Mean Reversion Indicator [CTH]

Mean Reversion Indicator: User Guide

The Mean Reversion Indicator is designed to help traders identify potential trade setups based on the principles of mean reversion while following the longer-term trend. By integrating RSI, Bollinger Bands, and Long-Term Moving Averages (MA), the indicator highlights opportunities to capitalize on Failed Volatility Breakouts (FVBO) and divergence patterns.

How the Indicator Works

Mean Reversion Setup

The indicator uses RSI to detect overbought/oversold conditions.
Bollinger Bands help identify volatility and potential price reversion points.
A long-term MA establishes the overall market trend to guide trades in the direction of the dominant trend.


Failed Volatility Breakouts (FVBO)

The hypothesis of FVBO is used to detect price setups where Bollinger Bands fail to maintain a breakout, signaling potential reversals.
FVBO signals are visually represented with arrows and color-coded candles to simplify identification.


RSI Divergences

The RSI highlights bullish and bearish divergences, providing early warnings of potential reversals.

Trade Setups

Step 1: Long Position

Check MA Direction: Ensure the long-term MA is below the price candles, indicating an uptrend colored blue.

Identify FVBO: A blue candle with an arrow below the price indicates a FVBO Long setup. Please note multiple FVBOs may occur in bullish and bearish market conditions.

RSI Oversold: Confirm the RSI is in oversold territory.

The setup suggests a good opportunity to go long.

Exit Point: Aim for the mid/upper Bollinger Band as the target.


Step 2: Short Position

Check MA Direction: Ensure the long-term MA is above the price candles, indicating a downtrend colored red.

Identify FVBO:

A red candle with an arrow above the price indicates a FVBO Short setup.

RSI Overbought: Confirm the RSI is in overbought territory.

The setup suggests a good opportunity to go short.

Exit Point: Aim for the mid/lower Bollinger Band as the target.

RSI Divergences

Bearish Divergence

Occurs when price increases while the RSI decreases. The indicator displays a red line connecting the divergence points on the RSI, accompanied by a red S to highlight a potential short entry.

Bullish Divergence

Occurs when price decreases while the RSI increases. The indicator displays a blue line connecting the divergence points on the RSI, accompanied by a blue B to highlight a potential long entry.

Customization Options

Inputs

RSI Settings: Adjust the RSI values to match your trading style and preferences.

Bollinger Bands: Configure the band settings to control sensitivity and range.

Moving Average: Modify the long-term MA characteristics (length, type) to suit your analysis.

Visual Adjustments

Divergence Display: Customize the colors and shapes used for bullish and bearish divergences (e.g., lines and markers).

RSI Display: Adjust the RSI line color and style for better visibility.

MA Display: Modify the color and thickness of the moving average to align with your charting preferences.

Practical Tips

Use the FVBO signals in conjunction with other market context, such as volume or candlestick patterns, to improve accuracy. Keep the long-term MA direction in mind to ensure trades align with the broader trend. Combine divergences with FVBO setups for high-probability entries.
Experiment with input settings to optimize performance for your chosen time frame and market conditions.