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Momentum Discrepancy Reversal Points (MDRP) is a great indicator for showing reversal points, and significant support/resistance levels. The indicator incorporates numerous logical sub-routines. These logical sub-routines are based upon the price and RSI values which are stored in a multi-dimensional matrix. When the logical sub-routines are detect a pricing versus RSI discrepancy it will change the width and color of a horizontal line drawn on the price cart. The colors will vary depending upon if prices are about to reverse higher or lower.

The MPRP monitors the relationship of the RSI indicator and price over a period of time. It indicates points in time where the value of the RSI indicator has become over-extended in relationship to a prior particular price, which is stored in a multidimensional matrix. The MDRP highlights these time areas by using a line that changes it color and thickness.

The internal workings of the MDPR indicator are fully explained in “The Complete RSI Book” written by John Hayden. Traders Press will be publishing the book in the spring of 2003. Purchasers of the MYRD will also receive a detailed explanation on how to use it. However, in order to provide an overview of how this indicator works the following description should suffice. For those traders that would like to see the actual Easy Language code they may purchase the code for additional money.

The principles of the MDRP are applicable to any momentum based indicator however for a variety of reasons too numerous too elaborate in this short description the MDRP indicator incorporates the RSI as developed by Wiles Wilder. The Momentum Discrepancy Reversal Points (MDRP) is constructed using logical arguments that set internal flags, which are associated with prior prices and the correlated RSI values.

The user of the program has 7 options in setting up the indicator. These are:

  1. RSI_LkBk this sets the number of prior bars that the RSI formula uses. The default setting is 14 bars.
  2. LKB - this sets the number of bars that the indicator references. The default setting is 30.
  3. SellTrig – this sets the level that the RSI must hit before it will start the logical sub-routines that look for a sell signal. The default setting is 50.
  4. BuyTrig – this sets the level that the RSI must hit before it will start the logical sub-routines that look for a buy signal. The default setting is 50.
  5. InSync – this option tells the MARD if it should filter the reversal signals using a simple moving average and an exponential moving average both of which are based on price.
  6. sma – this sets the number of bars used to calculate the simple moving average. The default setting is 9
  7. wma – this sets the number of bars used to calculate the weighted moving average. The default setting is 45.
  8. CheckAlert – this option if checked in Trade Station will alert the trader that a reversal signal has been detected.

The indicator constantly compares the closing price of the current bar and the associated value for the RSI to the values stored in multiple multi-dimensional matrixes (or array). These matrixes consist of prior closing prices (as controlled by LKB), RSI values, and correlated flags. Whenever the RSI exhibits behavior (as detected by various logical testing loops) indicating that the RSI is over extended to the upside it plots this discrepancy as a line that is either yellow or red. Upon seeing either a yellow or red plot appear the trader will know that a reversal to the downside is probably imminent. Should the MARD detect a discrepancy where the current RSI value is “stronger” than the matrix values it will plot a cyan or green colored line. In this way the trader is alerted that a reversal to the upside is imminent.

The meaning of the different colors is thus:

  1. Yellow - the indicator is detecting a discrepancy indicating tentative weakness.
  2. Red - plotted line will change to red when the subsequent bar confirms this discrepancy.
  3. Cyan - the indicator is indicating that it has detected a discrepancy which indicates that the RSI is indicating tentative strength.
  4. Green – when the price and RSI behavior in the subsequent bar confirm this then the plotted line color changes indicating that prices should rally.

Using the MDRP

Since the MDRP relies on logical arguments, which are constantly comparing what the current closing price are doing as compared to a matrix, it is a very strong indicator. There are two primary methodologies a trader could use the MDRP indicator.

The first way is as a reversal signal. Used this way the trader would begin looking for a price to enter the market at. Since this is only a indicator albeit a great one, and not a “trading system” a trader would need to incorporate other rules/methodologies before actually entering into a trade. In other words, a trader that saw a yellow line segment would begin looking for a reason to get short. These reasons should be based upon price action. The reason a trader should use price action is because typically the amount of time a trader has to enter a trade is limited to only a few subsequent bars. Should a trader be using other indicators they would need to generate concurrent signals or be based upon a smaller time frame. This is because indicators, which are strictly mathematical, are typically a lagging indicator.

The second method in using the MDRP indicator is as a way to indicate significant price levels. These significant price levels would be used as a reference for order entry or stop orders. Since a significant price that is above the current price action is resistance, placing a stop order above this level should be “safe”. In other words if we have a significant price level of 920.25 and prices are 918.5 we could place a buy stop order to exit our short at 920.50. This buy stop should be safe from the “noise” in the marketplace. Should our buy stop be exercised in all probability prices will be heading higher. Perhaps we might even want to reverse? Since what was resistance becomes support once prices close above it, we can continue to use this price level. Should prices subsequently negate this support level it then becomes resistance once again. The MARD is very good at indicating these key price levels.

The best way to use the MTDR is to incorporate both aspects into ones trading methodology. The following charts will illustrate certain principals.

Note: If you would like to see a higher resolution image please click anywhere within the image, then use your browser "back" button to return to this screen.

Chart #1. The MARD has 4 signals indicating weakness (and 1 indicating strength) in price behavior and the RSI. Please note that the vertical and horizontal lines on the price chart are NOT part of the indicator. The vertical lines are drawn on the screen to help in aligning the signal with the price bar. The horizontal lines (red or cyan) are drawn to indicate how the closing price that coincides with the signal often becomes significant support/resistance numbers. The MARD signals are in the bottom panel. These signals are not filtered using the “InSync” option. TO SEE A LARGER IMAGE CLICK ON THE ABOVE CHART

Chart #2. Indicating strength in the RSI. These signals are not filtered using the “InSync” option. MARD only generated one signal for the entire day. Note how the significant price from 11:20 was temporary support at 3:20, and it then became resistance at 3:40 and 3:45. The MARD is a very powerful indicator. You can also see a reversal down indication before the cash market opened at the far left.

Chart #3. Every system/indicator developer can “hand pick” what charts to display so that his system or indicator looks like the “Holy Grail” itself. I feel this lacks integrity. The above chart is one where the MARD generates some “false signals”. This chart highlights why we need to combine price action and possibly filter the signals we get. At 9:45 MARD indicated that the RSI was weak and should collapse, it fell however when positive news was released at 10:00 prices rallied sharply. Knowing that the close price at 9:45 was a significant resistance level would have been very helpful trading a “news event”. Then at 12:45 we had a sell signal, which proved to be 40 minutes early – again price behavior was key. In the next chart you can see how filtering the signal with the “InSync” option would have eliminated this signal. Then when price did collapse we got a buy signal at 1:35 – again it was early however by using price action we would of only established out long position when the high of 1:45 was exceeded. If we failed in getting at long at 1:45:01 we could of done so at 2:30. This is because at 1:35 we had a significant price (957.00) generated indicating resistance (prices continued below it). Once prices rallied above this resistance level 957.00 it would become significant support. Then at 2:30 when prices subsequently retraced to this level we would of gotten long.

Chart #4. This chart is the same as the one above however the “InSync” option is set (turned on) on the top panel therefore we are filtering our MARD signals using a simple moving average and exponential moving average (both parameters are user settable). Filtering our signals increases their validity, while reducing their quantity. An option is to run two instances of the indicator (as above). Doing this will generate all of the signals so we will know all of the significant prices, while allowing us to see the signals that are “more valid”.

In conclusion the MDRP does not generate a lot of trading signals, however when they are generated the closing price that generates them is always significant, and often times prices move in the direction indicated. At times the MDRP will generate a signal several bars before prices actually reverse. Consequently a trader should use price behavior rules before entering a trade. The signals generated may be filtered using the moving average on price. This is effective especially in sideways trending markets. The major strength of the MARD is indicating high probability reversal points, and the correlated significant price levels.

Users of this indicator will receive an in-depth description of how this indicator works, and various methodologies that one could use to implement using these reversal points in ones trading strategy. It is highly recommended that in order to fully understand this indicator that traders thoroughly understand the RSI. This is best accomplished by reading the “The Complete RSI Book” written by John Hayden and published by Traders Press.

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