Stochastic Zone Strength Trend [wbburgin]

28 มิ.ย. 2023

(This script was originally invite-only, but I'd vastly prefer contributing to the TradingView community more than anything else, so I am making it public :) I'd much rather share my ideas with you all.)

The Stochastic Zone Strength Trend indicator is a very powerful momentum and trend indicator that 1) identifies trend direction and strength, 2) determines pullbacks and reversals (including oversold and overbought conditions), 3) identifies divergences, and 4) can filter out ranges. I have some examples below on how to use it to its full effectiveness. It is composed of two components: Stochastic Zone Strength and Stochastic Trend Strength.

Stochastic Zone Strength
https://www.tradingview.com/x/cb54v0e6

At its most basic level, the stochastic Zone Strength plots the momentum of the price action of the instrument, and identifies bearish and bullish changes with a high degree of accuracy. Think of the stochastic Zone Strength as a much more robust equivalent of the RSI. Momentum-change thresholds are demonstrated by the "20" and "80" levels on the indicator (see below image).

https://www.tradingview.com/x/8263DA9I

Stochastic Trend Strength
The stochastic Trend Strength component of the script uses resistance in each candlestick to calculate the trend strength of the instrument. I'll go more into detail about the settings after my description of how to use the indicator, but there are two forms of the stochastic Trend Strength:

Anchored at 50 (directional stochastic Trend Strength):

https://www.tradingview.com/x/QLeUo8R1

The directional stochastic Trend Strength can be used similarly to the MACD difference or other histogram-like indicators : a rising plot indicates an upward trend, while a falling plot indicates a downward trend.

Anchored at 0 (nondirectional stochastic Trend Strength):

https://www.tradingview.com/x/rX1catuo

The nondirectional stochastic Trend Strength can be used similarly to the ADX or other non-directional indicators : a rising plot indicates increasing trend strength, and look at the stochastic Zone Strength component and your instrument to determine if this indicates increasing bullish strength or increasing bearish strength (see photo below):

https://www.tradingview.com/x/xMc6jJn5

(In the above photo, a bearish divergence indicated that the high Trend Strength predicted a strong downwards move, which was confirmed shortly after. Later, a bullish move upward by the Zone Strength while the Trend Strength was elevated predicated a strong upwards move, which was also confirmed. Note the period where the Trend Strength never reached above 80, which indicated a ranging period (and thus unprofitable to enter or exit)).

How to Use the Indicator
https://www.tradingview.com/x/TsLR8Giw

The above image is a good example on how to use the indicator to determine divergences and possible pivot points (lines and circles, respectively). I recommend using both the stochastic Zone Strength and the stochastic Trend Strength at the same time, as it can give you a robust picture of where momentum is in relation to the price action and its trajectory. Every color is changeable in the settings.

Settings
The Amplitude of the indicator is essentially the high-low lookback for both components.

The Wavelength of the indicator is how stretched-out you want the indicator to be: how many amplitudes do you want the indicator to process in one given bar.

A useful analogy that I use (and that I derived the names from) is from traditional physics. In wave motion, the Amplitude is the up-down sensitivity of the wave, and the Wavelength is the side-side stretch of the wave.

The Smoothing Factor of the settings is simply how smoothed you want the stochastic to be. It's not that important in most circumstances.

Trend Anchor was covered above (see my description of Trend Strength). The "Trend Transform MA Length" is the EMA length of the Trend Strength that you use to transform it into the directional oscillator. Think of the EMA being transformed onto the 50 line and then the Trend Strength being dragged relative to that.

Trend Transform MA Length is the EMA length you want to use for transforming the nondirectional Trend Strength (anchored at 0) into the directional Trend Strength (anchored at 50). I suggest this be the same as the wavelength.

Trend Plot Type can transform the Nondirectional Trend Strength into a line plot so that it doesn't murk up the background.

Finally, the colors are changeable on the bottom.

Explanation of Zone Strength
If you're knowledgeable in Pine Script, I encourage you to look at the code to try to understand the concept, as it's a little complicated. The theory behind my Zone Strength concept is that the wicks in every bar can be used create an index of bullish and bearish resistance, as a wick signifies that the price crossed above a threshold before returning to its origin. This distance metric is unique because most indicators/formulas for calculating relative strength use a displacement metric (such as close - open) instead of measuring how far the price actually moved (up and down) within a candlestick. This is what the Zone Strength concept represents - the hesitation within the bar that is not typically represented in typical momentum indicators.

In the script's code I have step by step explanations of how the formula is calculated and why it is calculated as such. I encourage you to play around with the amplitude and wavelength inputs as they can make the zone strength look very different and perform differently depending on your interests.

Enjoy!
Walker