Trend Momentum Strength Indicator

The Trend Momentum Strength Indicator tool provides a comprehensive analysis of both trend intensity and momentum, specifically optimized for pairs trading and mean-reversion strategies. By integrating modified ADX and Stochastic oscillators, it allows traders to identify periods of market neutrality or trend strength to time entries more effectively.

Usage

The indicator is designed to help traders navigate different market regimes. In pairs trading, for instance, traders often look for "no trend" scenarios where prices are expected to mean-revert.

• Trend Identification: Use the DI+ (Green) and DI- (Red) lines to determine direction. When DI+ is above DI-, the trend is upward; when DI- is above DI+, the trend is downward.
• Trend Strength (ADX): The black line represents the ADX. Values below 20 suggest a neutral or ranging market, while values above 25 indicate a strong trend.
• Momentum (Stochastics): The internal %K and %D calculations help identify overbought and oversold conditions.
• Signals: Labels "L" (Long) and "S" (Short) appear based on the selected "Show signals for" mode. For example, in "Pairs Trading" mode, signals trigger when the market is neutral (ADX < 20) and stochastics indicate a reversal.
• Momentum Histogram: The colored area at the bottom indicates momentum direction; Green suggests upward momentum (ratio > 1), while Red suggests downward momentum (ratio < 1).

Details

The script builds upon the standard Average Directional Index (ADX) formula but modifies the implementation to be more responsive. It evaluates the ratio between DI+ and DI- to drive the visual momentum area. Furthermore, it incorporates Stochastic %K and %D logic to filter entries. The primary logic revolves around the adxDi variable, which classifies the market into tiers: Neutral (0), Weak (5), or Strong (10), allowing the signal engine to fire only when the market strength matches the user's selected strategy.

Settings

General Settings

• Length: The lookback period for the ADX and Directional Movement calculations.
• Threshold: The level used for trend strength evaluation.
• Show signals for: Determines the logic for trade labels. Options include "Pairs Trading (No trend)", "Weak or strong trend", and "Strong trend".

Stochastic Settings

• %K Length: The period for the raw stochastic calculation.
• %K Smoothing: The smoothing factor for the %K line.
• %D Smoothing: The moving average period applied to %K to create the %D signal line.
• stoch short: The overbought threshold for short signals (e.g., 80).
• stoch long: The oversold threshold for long signals (e.g., 20).

FAQ

How do I interpret the colored area at the bottom?

The height and color of the area represent the strength of the directional momentum. A higher green area indicates stronger upward momentum, while a lower red area indicates stronger downward momentum.

Which mode should I use for mean-reversion?

For mean-reversion or pairs trading, the "Pairs Trading (No trend)" setting is recommended, as it focuses on signals that occur when the ADX indicates a lack of a strong directional trend.

How can I access Trend Momentum Strength Indicator?

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