Adaptive RSI-Stoch with Butterworth Filter [UAlgo]

10 Sep

The Adaptive RSI-Stoch with Butterworth Filter [UAlgo] is a technical indicator designed to combine the strengths of the Relative Strength Index (RSI), Stochastic Oscillator, and a Butterworth Filter to provide a smooth and adaptive momentum-based trading signal. This custom-built indicator leverages the RSI to measure market momentum, applies Stochastic calculations for overbought/oversold conditions, and incorporates a Butterworth Filter to reduce noise and smooth out price movements for enhanced signal reliability.

By utilizing these combined methods, this indicator aims to help traders identify potential market reversal points, momentum shifts, and overbought/oversold conditions with greater precision, while minimizing false signals in volatile markets.



🔶 Key Features

Adaptive RSI and Stochastic Oscillator: Calculates RSI using a configurable period and applies a dual-smoothing mechanism with Stochastic Oscillator values (K and D lines).
Helps in identifying momentum strength and potential trend reversals.

Butterworth Filter: An advanced signal processing filter that reduces noise and smooths out the indicator values for better trend identification.

The filter can be enabled or disabled based on user preferences.

Customizable Parameters: Flexibility to adjust the length of RSI, the smoothing factors for Stochastic (K and D values), and the Butterworth Filter period.

🔶 Interpreting the Indicator

RSI & Stochastic Calculations:

The RSI is calculated based on the closing price over the user-defined period, and further smoothed to generate Stochastic Oscillator values.

The K and D values of the Stochastic Oscillator provide insights into short-term overbought or oversold conditions.



Butterworth Filter Application:

What is Butterworth Filter and How It Works?

The Butterworth Filter is a type of signal processing filter that is designed to have a maximally flat frequency response in the passband, meaning it doesn’t distort the frequency components of the signal within the desired range. It is widely used in digital signal processing and technical analysis to smooth noisy data while preserving the important trends in the underlying data. In this indicator, the Butterworth Filter is applied to the trigger value, making the resulting signal smoother and more stable by filtering out short-term fluctuations or noise in price data.

Key Concepts Behind the Butterworth Filter:

Filter Design: The Butterworth filter works by calculating weighted averages of current and past inputs (price or indicator values) and outputs to produce a smooth output. It is characterized by the absence of ripple in the passband and a smooth roll-off after the cutoff frequency.

Cutoff Frequency: The period specified in the indicator acts as a control for the cutoff frequency. A higher period means the filter will remove more high-frequency noise and retain longer-term trends, while a lower period means it will respond more to short-term fluctuations in the data.

Smoothing Process: In this script, the Butterworth Filter is calculated recursively using the following formula,

Pine Script®

Pine Script®

Recursive Calculation: The filter operates by taking into account not only the current input value but also the previous two input values and the previous two output values. This recursive nature helps it smooth the signal by blending the recent past data with the current data.

Pine Script®

Pine Script®

This means the current filtered value is determined by the combination of:

A weighted sum of the current input and the last two inputs.
A correction based on the last two output values to ensure smoothness and remove noise.

In conclusion when filter is enabled, the Butterworth Filter smooths the RSI and Stochastic values to reduce market noise and highlight significant momentum shifts.
The filtered trigger value (post-Butterworth) provides a cleaner representation of the market's momentum.





Cross Signals for Trade Entries:

Buy Signal: A bullish crossover of the K value above the D value, particularly when the values are below 40 and when the Stochastic trigger is below 1 and the filtered trigger is below 35.

Sell Signal: A bearish crossunder of the K value below the D value, particularly when the values are above 60 and when the Stochastic trigger is above 99 and the filtered trigger is above 90.

These signals are plotted visually on the chart for easy identification of potential trading opportunities.



Overbought and Oversold Zones:

The indicator highlights the overbought zone when the filtered trigger surpasses a specific threshold (typically above 100) and the oversold zone when it drops below 0.

The color-coded fill areas between the Stochastic and trigger lines help visualize when the market may be overbought (likely a reversal down) or oversold (potential reversal up).

🔶 Disclaimer

Use with Caution: This indicator is provided for educational and informational purposes only and should not be considered as financial advice. Users should exercise caution and perform their own analysis before making trading decisions based on the indicator's signals.

Not Financial Advice: The information provided by this indicator does not constitute financial advice, and the creator (UAlgo) shall not be held responsible for any trading losses incurred as a result of using this indicator.

Backtesting Recommended: Traders are encouraged to backtest the indicator thoroughly on historical data before using it in live trading to assess its performance and suitability for their trading strategies.

Risk Management: Trading involves inherent risks, and users should implement proper risk management strategies, including but not limited to stop-loss orders and position sizing, to mitigate potential losses.

No Guarantees: The accuracy and reliability of the indicator's signals cannot be guaranteed, as they are based on historical price data and past performance may not be indicative of future results.

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Pinescript version update.