Adaptive DEMA Momentum Oscillator (ADMO)

6 days ago

Overview:

The Adaptive DEMA Momentum Oscillator (ADMO) is an open-source technical analysis tool developed to measure market momentum using a Double Exponential Moving Average (DEMA) and adaptive standard deviation. By dynamically combining price deviation from the moving average with normalized standard deviation, ADMO provides traders with a powerful way to interpret market conditions.

Key Features:

Double Exponential Moving Average (DEMA):
The core calculation of the indicator is based on DEMA, which is known for being more responsive to price changes compared to traditional moving averages. This makes the ADMO capable of capturing trend momentum effectively.

Standard Deviation Integration:
A normalized standard deviation is used to adaptively weight the oscillator. This makes the indicator more sensitive to market volatility, enhancing responsiveness during high volatility and reducing sensitivity during calmer periods.

Oscillator Representation:
The final oscillator value is derived from the combination of the DEMA-based Z-score and the normalized standard deviation. This final value is visualized as a color-coded histogram, reflecting bullish or bearish momentum.

Color-Coded Histogram:

Bullish Momentum: Values above zero are colored using a customizable bullish color (default: light green).

Bearish Momentum: Values below zero are colored using a customizable bearish color (default: red).

How It Works:

Inputs:

DEMA Length: Defines the period used for calculating the Double Exponential Moving Average. It can be adjusted from 1 to 200 to suit different trading styles.

Standard Deviation Length: Sets the lookback period for standard deviation calculations, which influences the responsiveness of the oscillator.

Standard Deviation Weight (StdDev Weight): Controls the weight given to the normalized standard deviation, allowing customization of the oscillator's sensitivity to volatility.

Calculation Steps:

Double Exponential Moving Average Calculation:
The DEMA is calculated using two exponential moving averages, which helps in reducing lag compared to a simple moving average.

Z-score Calculation:
The Z-score is derived by comparing the difference between the DEMA and its smoothed average (LSMA) to the standard deviation. This indicates how far the current value is from the mean in units of standard deviation.

Normalized Standard Deviation:
The standard deviation is normalized by subtracting the mean standard deviation and dividing by the standard deviation of the values. This helps to make the oscillator adaptive to recent changes in volatility.

Final Oscillator Value:
The final value is calculated by multiplying the Z-score with a factor based on the normalized standard deviation, resulting in a momentum indicator that adapts to different market conditions.

Visualization:

Histogram: The oscillator is plotted as a histogram, with color-coded bars showing the strength and direction of market momentum.

Positive (bullish) values are shown in green, indicating upward momentum.

Negative (bearish) values are shown in red, indicating downward momentum.

Zero Line: A zero line is plotted to provide a reference point, helping users quickly determine whether the current momentum is bullish or bearish.

Example Use Cases:

Momentum Identification:
ADMO helps identify the current market momentum by dynamically adapting to changes in market volatility. When the histogram is above zero and green, it indicates bullish conditions, whereas values below zero and red suggest bearish momentum.

Volatility-Adjusted Signals:
The normalized standard deviation weighting allows the ADMO to provide more reliable signals during different market conditions. This makes it particularly useful for traders who want to be responsive to market volatility while avoiding false signals.

Trend Confirmation and Divergence:
ADMO can be used to confirm the strength of a trend or identify potential divergences between price and momentum. This helps traders spot potential reversal points or continuation signals.

Summary:

The Adaptive DEMA Momentum Oscillator (ADMO) offers a unique approach by combining momentum analysis with adaptive standard deviation. The integration of DEMA makes it responsive to price changes, while the standard deviation adjustment helps it stay relevant in both high and low volatility environments. It's a versatile tool for traders who need an adaptive, momentum-based approach to technical analysis.

Feel free to explore the code and adapt it to your trading strategy. The open-source nature of this tool allows you to adjust the settings and visualize the output to fit your personal trading preferences.