This script is a modified version of the Relative Strength Indicator ( RSI ). While using RSI to trade the markets, the signals generated are very choppy.
Approach 1. One way to reduce this noise is to use a higher period for the RSI calculation. (say 20 instead of 14 period). In this approach, the valid signal comes quite late.
Approach 2. My unique solution is to use a Exponential Moving Average as the input for the RSI calculation. Usually RSI calculations are based on close value of the candles. If we use an appropriate EMA value, then the signal efficiency will increase.
Using the approach 2, strategies similar to regular RSI can be utilized i.e. RSI breakout, RSI divergence, RSI Hidden divergence.
RSI Colors explained
GREEN = BULLISH momentum when RSI >60
RED = BEARISH momentum when RSI <40
BLACK = NEUTRAL market conditions when RSI is between 40 and 60
Breakout Strategy
LONGS - RSI color is GREEN + Price breaks a Resistance
SHORTS - RSI color is RED + Price breaks a Support
Recommended default settings: EMA =7 period , RSI =14 period
ADDITIONAL TIP: Works wonderfully with Pivot Points (standard)
I recommended to use on minimum 5 MINUTE timeframe for intraday trades. But you can use different timeframes as well.
Please leave comment below If you have any question or development idea.
Release Notes
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NEW UPDATE: Version 2.0 1. Candle color changes made. Borrowed the idea from RolandoSantos from his TKP RSI BAR COLOR indicator. The code was simplified to adjust to the RSI conditions.
2. RSI Upper and lower band values can be adjusted using ---> Bullish Bar Color and Bearish Bar Color inputs 3. Interpreting Candle Color BLUE ----> side ways market (RSI value is between upper band and lower band values) Candle Color GREEN ----> bullish market (RSI value is above upper band) Candle Color RED ----> Bearish market (RSI value below lower band)
TIP: Use Hull Moving Average (200 period) to filter trades.