Bear in mind that there is always some lag when using Moving-Averages, hence the purpose of this indicator is as a trend identification tool rather than an entry-exit strategy.
The basic idea behind this indicator is the following:
- In a trendy market you will find high correlation between price and all kinds of Moving-Averages. This works both ways, no matter bull or bear trend.
- In sideways markets you might find a mix of correlations accross timeframes (2018) or high correlation with Low-Timeframe averages and low correlation with High-Timeframe averages (2021/2022).
- Trend shifts might be characterised by a 'staircase' type of correlation (yellow), where the asset regains correlation with higher timeframe averages
1. Source: data used for indicator calculation
1. Correlation Window: size of moving window for correlation calculation
2. Average Type:
- Simple-Moving-Average (SMA)
- Exponential-Moving-Average (EMA)
- Hull-Moving-Average (HMA)
- Volume-Weighted-Moving-Average (VWMA)
3. Lookback: number of past candles to calculate average
4. Gradient: modify gradient colors. colors relate to correlation values.
The indicator plots, using colors, the correlation of the asset with 4 averages. For every candle, 4 correlation values are generated, corresponding to 4 colors. These 4 colors are stacked one on top of the other generating the patterns explained above. These patterns may help you identify what kind of market you're in.
In true TradingView spirit, the author of this script has published it open-source, so traders can understand and verify it. Cheers to the author! You may use it for free, but reuse of this code in a publication is governed by House Rules. You can favorite it to use it on a chart.