Moving Average Dispersion Index w/ Z-Score (Adjusted MADI-Z)
Overview
The Adjusted MADI-Z indicator is a custom indicator that looks to decipher trends and consolidations based on the clustering and dispersion of Moving Averages. It calculates a z-score based on the dispersion of various exponentially weighted moving averages to identify trends and consolidation. The z-score is then adjusted using a logistic function to map it between 0-100.
How can it be used?
- Identify trends and consolidation - Values above 80 indicate a strong trend while values below 20 show consolidation - Gauge trend strength - Higher positive values suggest a stronger uptrend while lower negative values indicate a stronger downtrend - Generate trading signals - Crossovers of key levels can act as entry/exit triggers - Smooth noise in price action - The adjusted z-score filters out market noise
The Adjusted MADI-Z can be used for trend-following strategies across various timeframes. Specific strategies include:
- Trend trading - Enter long on crossover above 80, exit on crossover below 80. Reverse for short trades. - Range trading - Enter short on crossover below 20, exit on crossover above 20. Reverse for long trades. - Identifying pullbacks - Temporary moves below 80 during uptrends and above 20 during downtrends can act as retracement entry points.
Rationale
By adjusting the z-score output of the standard MADI using a logistic function, the indicator becomes bounded and easier to interpret for trading purposes. The customized moving average lengths also allow tuning the indicator to particular assets and timeframes.
Interpretation
- Above 80 - Strong uptrend - 70 to 80 - Moderate uptrend - 50 to 70 - Weak uptrend - 30 to 50 - Range-bound consolidation - 20 to 30 - Weak downtrend - Below 20 - Strong downtrend
Values below 15 or above 85 represent extremes outside two standard deviations.
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