Introduction to the Simple Trend Detector Indicator
Oscillators can be very useful tools for identifying momentum direction and potential mean reversals. This is especially true with oscillators that are bound within a range and have markers indicating oversold and overbought market levels.
The Simple Trend Detector is an example of an oscillator which can be effectively used for identifying potential mean reversals coming from oversold and overbought markets.
What is the Simple Trend Detector Indicator?
The Simple Trend Detector (STD) Indicator is a momentum indicator which is based on the Relative Strength Index (RSI).
This indicator presents momentum direction as an oscillator. It plots a line which oscillates within a range of zero to one. The line it plots has almost the same characteristics as the RSI line. However, it tends to oscillate at a wider swing within its range.
It also has markers at levels 0.3 and 0.7. The area below 0.3 represents the oversold area, while the area above 0.7 represents the overbought area. The market is oversold if the STD line drops below 0.3 and overbought if the STD line breaches above 0.7. Both scenarios are prime conditions for a possible mean reversal.
How the Simple Trend Detector Indicator Works?
As mentioned above, this indicator is based on the RSI. As such, the formula that its algorithm uses are also very similar to the RSI. It plots its line based on a modified RSI formula, which normalizes the oscillations of the STD line within the range of zero to one. The result is an oscillator line with wider swings relative to the price swings on the price chart.
How to use the Simple Trend Detector Indicator for MT4
The Simple Trend Detector Indicator has just one modifiable variable within its indicator settings.
“STD Period” refers to the number of bars or periods the indicator uses to calculate for it oscillator line. This is the only variable which allows users to adjust the sensitivity of the oscillator line. A higher value would mean a flatter oscillator line with lesser oversold and overbought signals. On the other hand, a lower value would create an oscillator line which is more sensitive to price fluctuations.
Buy Trade Setup
When to Enter?
Wait for the STD line to drop below 0.3. Open a buy order if there is a confluence between the STD line crossing back above 0.3 and a bullish price action.
When to Exit?
Allow the STD line to swing above 0.7. Close the trade as soon as the STD line shows signs of a strong downward slope.
Sell Trade Setup
When to Enter?
Wait for the STD line to breach above 0.7. Open a sell order if there is a confluence between the STD line crossing back below 0.7 and a bearish price action.
When to Exit?
Allow the STD line to swing below 0.3. Close the trade as soon as the STD line shows signs of a strong upward slope.
Conclusion
The Simple Trend Detector can be a very useful tool for identifying possible mean reversals based on the short term momentum or trend. It is very sensitive to price oscillations allowing users to easily find possible mean reversals coming from oversold and overbought markets. However, its oscillations can also be very erratic and could sometimes produce false signals.
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