Introduction to the Variable Index Dynamic Average – VIDYA Indicator
One of the most common disadvantages of moving average lines is that the trend direction signals they often produce are too lagging. Traders often try to control this by modifying the number of periods used by the moving average line but it also often leads to an erratically oscillating moving average line.
The VIDYA Indicator was developed for the purpose of having a moving average line which could be very responsive to price movements by modifying the formula it uses.
What is the Variable Index Dynamic Average – VIDYA Indicator?
The Variable Index Dynamic Average or VIDYA Indicator is a trend following technical indicator which is a type of modified moving average. It calculates its moving average in a similar fashion as the Exponential Moving Average (EMA). The line that the VIDYA Indicator plots is characteristically very responsive to price movements.
How the Variable Index Dynamic Average – VIDYA Indicator Works?
The VIDYA Indicator has a simple formula within its algorithm which basically modifies the Simple Moving Average (SMA) by applying a standard deviation on to it. This creates a line that is highly responsive to price movements.
How to use the Variable Index Dynamic Average – VIDYA Indicator for MT4
The VIDYA Indicator has a couple of modifiable variables within its indicator settings which allows traders to tweak the sensitivity of the VIDYA Indicator line.
“Period” refers to the number of periods used by the indicator to compute for its moving average line the same way most moving average lines are tweaked.
“histper” is another variable which control the number of historical bars that the indicator uses as a threshold. It also modifies the smoothness and responsiveness of the indicator.
The VIDYA Indicator line can be used the same way as most moving average lines are used. It can be used to determine trend direction based on where price is in relation to the line and the slope of the line. It can also be used as a dynamic support and resistance line. It can also be used as one of the lines in a pair of moving averages when trading a moving average crossover strategy.
Buy Trade Setup
When to Enter?
Identify an uptrend market using another long-term moving average line as confirmation. Wait for price to temporarily dip below the VIDYA line. Open a buy order as soon as price closes above the VIDYA line. Set the stop loss on the support below the entry candle.
When to Exit?
Close the trade as soon as price action shows signs of a bearish reversal.
Sell Trade Setup
When to Enter?
Identify a downtrend market using another long-term moving average line as confirmation. Wait for price to temporarily breach above the VIDYA line. Open a sell order as soon as price closes below the VIDYA line. Set the stop loss on the resistance above the entry candle.
When to Exit?
Close the trade as soon as price action shows signs of a bullish reversal.
Conclusion
The VIDYA Indicator can be a useful moving average line for traders who prefer a very responsive moving average line. This moving average line can be reliable when used in the correct timeframe and in a market or currency pair that is trending with regular pullbacks.
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