Moving average deviation rate

The Moving average deviation rate tool measures the percentage distance between the current price and a simple moving average to identify overextended market conditions using normal distribution bands.

Usage

The Moving average deviation rate is primarily used to identify market extremes where price has moved too far away from its average. Traders can use this indicator to spot potential mean reversion opportunities or trend exhaustion points.

• Identifying Overbought/Oversold Levels: When the neutral rate line crosses above the upper standard deviation band (HiBound), the area fills red, indicating the price is significantly stretched to the upside. Conversely, when the line crosses below the lower band (LoBound), the area fills green, indicating the price is stretched to the downside.
• Trend Strength: A rate line that remains near the center line suggests a stable trend, while frequent touches or breaks of the bands suggest high volatility and potential upcoming corrections.

Details

Unlike standard Bollinger Bands, which apply standard deviation directly to price action, this script calculates the standard deviation of the deviation rate itself. This approach aims to provide a more normalized distribution of data.

The script first calculates the percentage difference between the closing price and a Simple Moving Average (SMA). It then calculates a second moving average and standard deviation based on that percentage rate. By plotting these bands around the deviation rate, the indicator creates a dynamic threshold that adjusts to historical volatility in price-to-SMA gaps. This helps in identifying statistical outliers where the price is moves beyond a typical "normal" range.

Settings

• Moving average period: Sets the lookback length for the Simple Moving Average (SMA) used to calculate the price deviation.
• Number of Std Deviations: Determines the multiplier for the bands. A value of 2 covers approximately 95% of the data points in a normal distribution, making breaches of these bands statistically significant.

FAQ

What is the difference between this and Bollinger Bands? While Bollinger Bands measure the volatility of price directly, this indicator measures the volatility of the gap between price and its moving average, providing a different perspective on mean reversion.

When are the alerts triggered? Alerts are triggered when the deviation rate crosses over the upper standard deviation band or crosses under the lower standard deviation band on a bar close.

How can I access this indicator? You can get access on the LuxAlgo Library for charting platforms like TradingView, MetaTrader (MT4/MT5), and NinjaTrader for free.