Liquidity Weighted Moving Averages

The Liquidity Weighted Moving Averages indicator aims to identify underlying market trends by isolating price action on bars with the highest levels of liquidity to filter out market noise and outliers.

Usage

The indicator can be used as a more robust alternative to traditional Moving Average crossover systems. By focusing only on bars where high volume resulted in minimal price displacement (signifying high liquidity), it attempts to find the "true fair value" of an asset.

Users can observe the relationship between the Fast and Slow Moving Averages:

• Bullish Trend: When the Fast MA is above the Slow MA, the area between them is colored green, suggesting an upward bias.
• Bearish Trend: When the Fast MA is below the Slow MA, the area between them is colored red, suggesting a downward bias.
• Crossovers: Shifts in the relationship between the two averages can be used to identify potential trend reversals or momentum shifts.

Details

The script operates on the logic that high liquidity makes it more difficult for market participants to move price aggressively. It calculates "coincident liquidity" by dividing volume by the absolute distance between the open and close of each bar.

To refine the data, the tool uses a standard deviation threshold to identify spikes in liquidity. When a bar's liquidity crosses above this boundary, the closing price is recorded. The resulting Moving Averages are then calculated based solely on these high-liquidity price points rather than every bar in the dataset. This methodology effectively removes price outliers and "empty" volume bars from the trend calculation.

Settings

• Outlier Threshold Length: The period used by the EMA and Standard Deviation calculation to determine what constitutes a significant spike in liquidity.
• Fast MA length: The period used for the faster moving average calculation.
• Slow MA length: The period used for the slower moving average calculation.

FAQ

How do I use the Liquidity Weighted Moving Averages? You can use it to identify trend direction and potential reversal points by monitoring the crossovers and the color-coded cloud between the fast and slow averages.

What makes this different from a standard EMA? Unlike a standard EMA that calculates values based on every bar, this tool only updates its internal price data when high liquidity is detected, filtering out noise from low-liquidity price movements.

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.