Chebyshev Filter Divergences

The Chebyshev Filter Divergences indicator provides a sophisticated oscillator based on the Chebyshev filter algorithm to help traders identify potential mean reversion points and trend shifts through price-oscillator divergences.

Usage

The tool is primarily used to identify market extremes and potential reversals. When the filtered price deviates significantly from its smoothed average, it signals that the price may be overextended.

• Divergence Detection: Users can enable bullish and bearish divergence markings. A bullish divergence occurs when the price makes a lower low but the Chebyshev oscillator makes a higher low, suggesting weakening downward momentum. Conversely, a bearish divergence occurs when the price makes a higher high but the oscillator makes a lower high.
• Directional Changes: The indicator plots "◇" symbols to signify a change in the direction of the filtered price. These can be used as early signals for potential trend shifts or exit points.
• Mean Reversion: The oscillator is normalized, allowing traders to observe when the signal enters the upper or lower shaded bands, which represent historical extremes relative to a smoothed average.

Details

The Chebyshev filter is a signal processing technique known for having a very sharp cutoff, which effectively removes high-frequency noise from price data while minimizing "ripple" (oscillations) in the passband.

This script applies the Chebyshev algorithm to the input source and then normalizes the result using a moving average and standard deviation. This transformation turns the filtered price into an oscillator that fluctuates around a zero-median line, making it suitable for standard oscillator analysis techniques such as divergence detection and overbought/oversold identification.

Settings

Chebyshev Filter

• Ripple (dB): Controls the ripple factor in decibels for the Chebyshev filter. Lower values typically result in a smoother line with more lag, while higher values provide a sharper response.
• Normalization Length: The lookback period used to calculate the basis and standard deviation for normalizing the filtered price.
• Source: The price data used for the calculation (default is Close).

Divergences

• Show Divergences: Toggles the visibility of divergence lines on the oscillator.
• Max of Range / Min of Range: Defines the lookback window (in bars) within which the script searches for pivot points to confirm a divergence.
• Pivots to Right / Left: Sets the number of bars required to confirm a pivot high or low.

Visual

• Color Up / Color Down: Customizes the colors used for bullish and bearish signals and the oscillator gradient.

FAQ

How do I interpret the colored background bands? The bands represent a smoothed average of the oscillator. When the oscillator is significantly above or below these bands, it indicates the price is deviating from its recent filtered trend, often preceding a mean reversion.

What is the "Ripple" setting? The Ripple setting is a specific parameter of Chebyshev filters that determines how much "oscillation" is allowed in the filter's frequency response. In a trading context, adjusting this affects the smoothness and reactivity of the indicator to price changes.

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