Mean Reversion and Momentum - Updated with gaussiana smoothing

The Mean Reversion and Momentum - Updated with gaussiana smoothing indicator aims to identify potential trend reversals and continuations by analyzing the relationship between mean reversion dynamics and price momentum. It utilizes Gaussian smoothing to reduce noise in the underlying calculations, providing a clearer view of market sentiment and cyclical shifts.

Usage

The indicator consists of two primary lines and confirmation signals displayed as squares at the top of the pane. Traders can interpret the relationship between the Mean Reversion and Momentum lines to gauge market direction:

• Trend Reversal: A divergence between the Mean Reversion line (green) and the Momentum line (red) often suggests a weakening trend and a potential reversal.
• Trend Continuation: Parallel movement between both lines indicates that the current trend is well-supported by both momentum and mean reversion factors, suggesting continuation.
• Confirmation Squares: Green squares appearing at the top of the chart serve as bullish confirmation signals, while red squares serve as bearish confirmation signals. These are triggered when price action deviates significantly from established means and satisfies specific threshold criteria.

Details

The script employs a dual-layered approach to market analysis. First, it calculates mean reversion by evaluating the current source price against short and long-term averages. A "beta" value is derived from these averages to determine if the price is overextended or trending.

Secondly, the script calculates log returns and momentum, which are then passed through a Gaussian filter (a type of low-pass filter) to smooth out high-frequency noise without introducing excessive lag. The final outputs are scaled to a normalized range, allowing for a comparative analysis between the two different mathematical concepts (Returns and Momentum) on a single oscillator pane.

Settings

• Source: Determines the price data used for all calculations (e.g., Close, HLC3).
• Mean Period Short: Sets the lookback period for the short-term moving average used in the buy/sell signal logic.
• Mean Period Long: Sets the lookback period for the long-term moving average used in the buy/sell signal logic.
• Buy Threshold: The sensitivity level required for the beta value to trigger a bullish confirmation square.
• Sell Threshold: The sensitivity level required for the beta value to trigger a bearish confirmation square.
• Indicator Length: The period used for calculating standard deviation, log returns, and the Gaussian smoothing window.
• Timeframe Multiplier: A multiplier applied to the return and momentum calculations to adjust the sensitivity to different time intervals.

FAQ

How do I interpret the Gaussian smoothed lines?

The green line represents the smoothed log returns (mean reversion), and the red line represents smoothed momentum. When they move in the same direction, the trend is strong; when they diverge, the trend may be exhausting.

What do the squares at the top of the indicator mean?

These are automated buy and sell signals based on the relationship between price and the long/short-term means. They provide a quick visual reference for potential entry or exit points.

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.