Auto Regression Divergence Indicator (ARDI)

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Auto Regression Divergence Indicator (ARDI)



Class: oscillator
Trading type: reverse trading
Time frame: any
Purpose: reverse points detection
Level of aggressiveness: any

Indicator «Auto Regression Divergence Indicator» (ARDI) is used to detect moments of divergence between current prices and fair (theoretical) value of the asset. Significant divergences signal about price entering into overbought/oversold zones. This is a base to open positions which are contrary to the current movement.

Structure of the indicator

Indicator consists of the multicolored oscillatory line. Green color signals that no significant divergences present. Blue (red) color signals about the presence of significant divergences between current and theoretical prices. Blue color means that price is in oversold zone and red – in overbought.

Input parameters of the indicator

To set up the indicator a number of input parameters are used:
- AR period (period of indicator, by default = 21) – is used to calculate the theoretical price based on linear regression model;
- Number of deviations (number of standard deviation, by default = 1) – this parameter is responsible for the level of aggressiveness. The bigger the value is the less quantity of the signals will be generated by the indicator, but the higher their quality will be.

Rules of trading

Indicator can be used on any time frame.

General rules of trading are as follows:
- When oscillatory line changes color on blue – this is a signal that current price enters the oversold zone;
- When oscillatory line changes color on red – this is a signal that current price enters the overbought zone;
- “buy” trades from the blue lines;
- “sell” trades from the red lines;
- it is desirable to wait for a change in the direction of the indicator line before opening a trade.