ATR Adjusted RSI

Oct 16

ATR Adjusted RSI Indicator
By Nathan Farmer

The ATR Adjusted RSI Indicator is a versatile indicator designed primarily for trend-following strategies, while also offering configurations for overbought/oversold (OB/OS) signals, making it suitable for mean-reversion setups. This tool combines the classic Relative Strength Index (RSI) with a unique Average True Range (ATR)-based smoothing mechanism, allowing traders to adjust their RSI signals according to market volatility for more reliable entries and exits.

Key Features:

ATR Weighted RSI:
At the core of this indicator is the ATR-adjusted RSI line, where the RSI is smoothed based on volatility (measured by the ATR). When volatility increases, the smoothing effect intensifies, resulting in a more stable and reliable RSI reading. This makes the indicator more responsive to market conditions, which is especially useful in trend-following systems.

Multiple Signal Types:
This indicator offers a variety of signal-generation methods, adaptable to different market environments and trading preferences:

1. RSI MA Crossovers: Generates signals when the RSI crosses above or below its moving average, with the flexibility to choose between different moving average types (SMA, EMA, WMA, etc.).
   
2. Midline Crossovers: Provides trend confirmation when either the RSI or its moving average crosses the 50 midline, signaling potential trend reversals.
   
3. ATR-Inversely Weighted RSI Variations: Uses the smoothed, ATR-adjusted RSI for a more refined and responsive trend-following signal. There are variations both for the MA crossover and the midline crossover.
   
4. Overbought/Oversold Conditions: Ideal for mean reversion setups, where signals are triggered when the RSI or its moving average crosses over overbought or oversold levels.
   

Flexible Customization:
With a wide range of customizable options, you can tailor the indicator to fit your personal trading style. Choose from various moving average types for the RSI, modify the ATR smoothing length, and adjust overbought/oversold levels to optimize your signals.

Usage:
While this indicator is primarily designed for trend-following, its OB/OS configurations make it highly effective for mean-reverting setups as well. Depending on your selected signal type, the relevant indicator line will change color between green and red to visually signal long or short opportunities. This flexibility allows traders to switch between trending and sideways market strategies seamlessly.

A Versatile Tool:
The ATR Adjusted RSI Indicator is a valuable component of any trading system, offering enhanced signals that adapt to market volatility. However, it is not recommended to rely on this indicator alone, especially without thorough backtesting. Its performance varies across different assets and timeframes, so it’s essential to experiment with the parameters to ensure consistent results before applying it in live trading.

Recommendation:
Before incorporating this indicator into live trading, backtest it extensively. Given its flexibility and wide range of signal-generation methods, backtesting allows you to optimize the settings for your preferred assets and timeframes. Only consider using it on it's own if you are confident in its performance based on your own backtest results, and even then, it is not recommended.

Oct 29

Release Notes

Added an ATR Multiple to enhance compatibility with lower-volatility assets or lower timeframes, where the ATR alone is too small to meaningfully alter the base signal of the RSI.

The default setting is 1.0, ideal for higher timeframes and more volatile assets, such as crypto on a 1D chart. However, for lower-volatility markets like Forex, consider raising this multiple to 20, 50, or even more.

Note:
Always adjust the ATR Multiple based on the asset and timeframe you're analyzing. Check the chart to ensure it provides the desired level of "smoothness." Keep in mind this isn't traditional smoothing; rather, it’s a weighting based on the ATR and whatever multiple you set. The ATR is what makes this adaptive, and with the added multiple it will be more robust on more assets.