DVO for MT4
The David Varadi Oscillator (DVO) dynamically identifies overbought and oversold levels even when price volatility changes over time. It was designed (Varadi, 2009) to be only a short-term oscillator (maximum smoothing period of 5) as the importance of intraday highs and lows decline over time.
The DVO can be used to create unique weighting schemes that function best for each class of security and define a local weight density for the instrument. It captures different cycle lengths, amplitudes, and return distributions of the security. The result is normalized using a percent rank function to re-scale the indicator on the basis of the historical distribution of values.
- Percent Rank Lookback Period
- Distinct price weights. The sum of these weights adds up to 1.
- Smoothing weights placed on each day for up to a maximum of 5 days back including today. Again sum of the weights would also add up to 1.
How to interpret
The general guideline is that the instrument is overbought above 50% and oversold below 50% but the best level is to be found for each class of security and/or financial instrument. Common levels are overbought above 70% and oversold below 30%.
Other DV indicators
The DV2 is a popular RSI(2) alternative and an indicator that derives from the DVO. It's simply one specific setting of the DVO that was originally designed for the SPY. It was determined that the open had very little value in this case, and that the optimal weighting period was nearly 50/50 over the last two days. As it turned out this weighting scheme worked very well also on almost all ETFs and on most stocks.