Here comes a study to indicate the idea of this article, Price Distance to its Moving Averages (P/MA Ratio)
The analysis expressed in the paper indicates that there is a connection between the distance of the prices to moving averages and subsequent returns : portfolios of stocks with lower prices to moving averages generally outperformed portfolios of stocks with higher prices to moving averages. This “overextended” effect is more pronounced when using shorter moving averages of 20 and 50 days, and is especially strong in short-term holding periods like one and two weeks. The highest annual returns are recorded when buying in the range of 0-5% below shorter moving averages of 20/50 days, and 0-10% below longer moving averages of 100/200 days. However, buying very far below almost all moving averages on almost all holding periods produces the lowest returns.
The concept of this study recognizes three different modes of action.
In a clearly established upward trend traders should be buying when prices are near or below the MA line and selling when prices move too far above the MA.
Conversely, in downward trend stocks should be shorted when reaching or going above the moving average and covered when they drop too far below the MA line.
In a sideways movement traders are advised to buy if the price is too low below the moving average and sell when it goes too far above it
Short-term traders can expect to outperform in a one or two week time window if buying stocks with lower prices compared to their 20 and 50 / , one to two-week holding periods is quite high, ranging from 72,09% to 90,61% for the (20, 50) and 85,03% to 87,5% for the (20, 50). The best results for the 20 and 50, on average, are concentrated in the region of 0-5% below the MA for the majority of holding periods. Buying very far below almost all MA in almost all holding periods turns out to be the worst possible option
Candle patterns, momentum could be used in conjunction with this indicator for better results. Try Colored DMI and colored SuperTrend by DGT
Secondly, Exponential Moving Average (EMA) is added as option besides SMA as it has been analyzed with the article stated above
Over bought and over sold levels needs to be adjusted based on the market. For crypto it is suggested 25/-25 (default setting) for forex and stocks 10/-10
the percentage of values 68.27%, 95.45% and 99.73% of the values lie within one, two and three standard deviations of the mean. nearly all values are taken to lie within three standard deviations of the mean, and thus it is empirically useful to treat 99.7% probability as near certainty.
Bollinger Bands, developed by John Bollinger, is a well-known technical analysis tool defined by a set of trendlines plotted two standard deviations (positively and negatively) away from a simple moving average (SMA) of a security's price
This update implements standard deviations concept adapted to fit the Price Distance to it's MA (P/MA) Indicator, with the aim to define threshold lines
On 1 min chart Bull/Bear cloud remain too much away from MA line. I use 1 min chart for daytrading/Scalping. However, indicator is good. I can't figure out how to attach screenshot here.
to correct the issue that apeared in lower timeframes, fixed threshold levels are replaced with dynamiclly changing levels by adapting standard deviations concept, in other words appliying bollinger bands to define threshold leves