L2 SVE Stochastic RSI

The L2 SVE Stochastic RSI indicator provides a smoothed version of the classic Stochastic RSI, designed to help traders identify trend reversals and price-momentum divergences with reduced noise.

Usage

The Usage section focuses on identifying overbought and oversold market conditions using the modified calculation proposed by Sylvain Vervoort. Traders typically look for the following:

• Overbought/Oversold Reversals: When the indicator crosses above the overbought level (default 80) or below the oversold level (default 20), it signals potential exhaustion in the current trend. Labels are provided on the chart to highlight these crosses.
• Divergence Analysis: By comparing price action peaks and troughs with the peaks and troughs of the SVE Stochastic RSI, users can identify bullish or bearish divergences, which often precede significant trend shifts.
• Trend Strength: The indicator uses a gradient color scheme to visualize the transition between bullish (green) and bearish (red) momentum.

Details

This script is based on Sylvain Vervoort’s article "The V-Trade, Part 6: Technical Analysis—Divergence Indicators" published in the August 2018 issue of Technical Analysis of STOCKS & COMMODITIES.

While the standard Stochastic RSI applies a stochastic formula directly to RSI values, Vervoort’s version introduces additional smoothing by applying Simple Moving Averages (SMA) to both the relative RSI range and the high-low RSI range before calculating the final percentage. This smoothing process is intended to filter out market noise, making divergences more apparent and reducing the frequency of whipsaws compared to the standard calculation.

Settings

• RSI Length: Determines the lookback period for the underlying Relative Strength Index calculation.
• Stochastic Length: Sets the lookback period for finding the highest and lowest RSI values.
• Stochastic Average Length: Controls the length of the SMA smoothing applied to the internal stochastic components.
• Overbought Level: The threshold (typically 80) above which the market is considered overbought.
• Oversold Level: The threshold (typically 20) below which the market is considered oversold.

FAQ

How do I use the L2 SVE Stochastic RSI?

You can use it to identify overbought/oversold conditions and spotting potential price-momentum divergences. Look for crosses of the 80 and 20 levels as potential entry or exit signals.

How does this differ from the standard Stochastic RSI?

This version includes an additional smoothing layer using moving averages on the stochastic components, as proposed by Sylvain Vervoort, to provide a cleaner signal with less noise.

Where 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.