Dynamo
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Overview
Dynamo is built to be the Swiss-knife for price-movement & strength detection, it aims to provide a holistic view of the current price across multiple dimensions. This is achieved by combining 3 very specific indicators(RSI, Stochastic & ADX) into a single view. Each of which serve a different purpose, and collectively provide a simple, yet powerful tool to gauge the true nature of price-action.
Background
Dynamo uses 3 technical analysis tools in conjunction to provide better insights into price movement, they are briefly explained below:
Relative Strength Index(RSI)
RSI is a popular indicator that is often used to measure the velocity of price change & the intensity of directional moves. RSI computes the relative strength of the current price by comparing the security’s bullish strength versus bearish strength for a given period, i.e. by comparing average gain to average loss.
It is a range bound(0-100) variable that generates a bullish reading if average gain is higher, and a bullish reading if average loss is higher. Values over 50 are generally considered bullish & values less than 50 indicate a bearish market. Values over 70 indicate an overbought condition, and values below 30 indicate oversold condition.
Stochastic
Stochastic is an indicator that aims to measure the momentum in the market, by comparing most recent closing price of the security to its price range for a given period. It is based on the assumption that price tends to close near the recent high in an up trend, and it closes near the recent low during a down trend.
It is also range bound(0-100), values over 80 indicate overbought condition and values below 20 indicate oversold condition.
Average Directional Index(ADX)
ADX is an indicator that can quantify trend strength, it is derived from two underlying indices, known as Directional Movement Index(DMI). +DMI represents strength of the up trend, and -DMI represents strength of the down trend, and ADX is the average of the two.
ADX is non-directional or trend-neutral, which means, it does not follow the direction of the price, instead ADX will rise only when there is a strong trend, it does not matter if it’s an up trend or a down trend. Typical ranges of ADX are 25-50 for a strong trend, anything below 25 is considered as no trend or weak trend. ADX can frequently shoot upto higher values, but it generally finds exhaustion levels around the 60-75 range.
About the script
All these indicators are very powerful tools, but just like any other indicator they have their limitations. Stochastic & ADX can generate false signals in volatile markets, meaning price wouldn’t always follow through with what’s being indicated. ADX may even fail to generate a signal in less volatile markets, simply because it is based on moving averages, it tends to react slower to price changes. RSI can also lose it’s effectiveness when markets are trending strong, as it can stay in the overbought or oversold ranges for an extended period of time.
Dynamo aims to provide the trader with a much broader perspective by bringing together these contrasting indicators into a single simplified view. When Stochastic becomes less reliable in highly volatile conditions, one can cross validate their deduction by looking at RSI patterns. When RSI gets stuck in overbought or oversold range, one can refer to ADX to get better picture about the current trend. Similarly, various combinations of rules & setups can be formulated to get a more deterministic view, when working with either of these indicators.
There many possible use cases for a tool like this, and it totally depends on how you want to use it. An obvious option is to use it to trigger signals only after it has been confirmed by two or more indicators, for example, RSI & Stochastic make a great combination for cross-over or cross-under strategies. Some of the other options include trend detection, strength detection, reversals or price rejection points, possible duration of a trend, and all of these can very easily be translated into effective entry and exit points for trades.
How to use it
Dynamo is an easy-to-use tool, just add it to your chart and you’re good to start with your market analysis. Output consists of three overlapping plots, each of which tackle price movement from a slightly different angle.
Stochastic: A momentum indicator that plots the current closing price in relation to the price-range over a given period of time.
Can be used to detect the direction of the price movement, potential reversals, or duration of an up/down move.
Plotted as grey coloured histograms in the background.
Relative Strength Index(RSI): RSI is also a momentum indicator that measures the velocity with which the price changes.
Can be used to detect the speed of the price movement, RSI divergences can be a nice way to detect directional changes.
Plotted as an aqua coloured line.
Average Directional Index(ADX): ADX is an indicator that is used to measure the strength of the current trend.
Can be used to measure how strong the price movement is, both up and down, or to establish long terms trends.
Plotted as an orange coloured line.
Features
Provides a well-rounded view of the market movement by amalgamating some of the best strength indicators, helping traders make better informed decisions with minimal effort.
Simplistic plots that aim to convey clean signals, as a result, reducing clutter on the chart, and hopefully in the trader's head too.
Combines different types of indicators into a single view, which leads to an optimised use of the precious screen real-estate.
Final Note
Dynamo is designed to be minimalistic in functionality and in appearance, as it is being built to be a general purpose tool that is not only beginner friendly, but can also be highly-configurable to meet the needs of pro traders.
Thresholds & default values for the indicators are only suggestions based on industry standards, they may not be an exact match for all markets & conditions. Hence, it is advisable for the user to test & adjust these values according their securities and trading styles.
The chart highlights one of many possible setups using this tool, and it can used to create various types of setups & strategies, but it is also worth noting that the usability & the effectiveness of this tool also depends on the user’s understanding & interpretation of the underlying indicators.
Lastly, this tool is only an indicator and should only be perceived that way. It does not guarantee anything, and the user should do their own research before committing to trades based on any indicator.
Strengthtrading
RSI medianA RSI implementation tailored for a specific use case.
Instead of using RSI with oversold and overbought values, I use it as a median value.
If the RSI is above 50, the trend is bullish.
If the RSI is below 50, the trend is bearish.
This indicator is customized to help you easily identify market strength/weakness based on which side of the median value the RSI is.
