The past few weeks, our team has been working on developing another trading tool that we believe will be very helpful in finding extreme readings in the markets. The scanner is fundamentally volatility reader on multiple periods. The user has the choice to select 5 "lookback" periods, which basically read the volatility of each period set, and compute a total reading, -5 to 5. For example, if the 4 day lookback period, the 7 day lookback period, and the 14 day lookback period all show signs of overbought, the indicator may print a +3 reading on the indicator. A +5 would mean that all lookback periods are printing overbought.
The XMR Indicator
The extreme mean reversion indicator (XMR) is a chart indicator used to identify potential reversals in a financial market. The XMR indicator specializes in scanning previous price action in order to signal potential overbought or oversold conditions in a market. The XMR is displayed as a bar chart, with a set range from -5 to +5. +5 is considered extremely overbought, and -5 being extremely oversold (dark gray)
The tool was built with the concept of mean reversion in mind, meaning that markets often return to historical means. With this in mind, this tool can be utilized to look for markets that have significantly moved away from their historical means and may be due for a reversal.
The available range for the XMR Indicator is -5 to +5. A reading of -5 is considered extremely oversold, while a reading of +5 is considered extremely overbought. However, these readings are rare, and are not the only levels to consider.
The XMR indicator has a wide range of potential uses. It can be a great tool for both trading range bound markets, or finding pullback setups in a trending market condition.
A reading on the XMR indicator of +1 to +5 is considered a market in which price is overbought, with +5 being more overbought than a reading of +1. Inversely, a reading of -1 to -5 is considered a market in which price is oversold, with -5 being more oversold than a reading of -1.
With this information, the XMR indicator can help spot a potential reversal in a market. Combining this information with other signals, such as a price action patterns, a fundamental bias, or other technical pattern could be useful in finding profitable trading setups.
Example 1 - Trading Ranges:
The XMR indicator usually excels in a range bound market. In the image below, you will see that the XMR indicator does a decent job at finding tops and bottoms in the range. A trader using the tool could look for readings indicating that markets may be stretched, combine it with additional technical signals, and take trades accordingly.
Example 2 - Trading Trends:
When a market is trending strongly, looking for reversals may be less profitable. However, the XMR indicator may still be a great way to look for pullbacks to join the trend. In the image below, you’ll see a market that is trending strongly to the downside, but pulls back and prints an overbought reading on the XMR indicator. This could be a way to spot and time pullbacks that have a strong likelihood of failing in favor of the dominant trend.
How to Set Up
Once the scanner is downloaded on to your computer, go into your MetaTrader platform and click on 'File' then 'Open Data Folder'.
Then, your folder should pop up and click on 'MQL4' >>> 'Indicators'. There, you will see all the indicators that MT4 downloaded.
Once you're there, drag the 'XMR_Indicator' download into your 'Indicators' folder.
Go to 'Indicators' on MT4. Scroll down to the XMR Indicator (You might have to refresh MT4 or close out and reopen it).
Finally, drag the scanner on to any chart and it will start running.
How to Customize
The scanner already has lookback periods built in to the input, but you can choose whatever time periods as well as whatever design you want.
Once the indicator is running, you can right click on the indicator and click 'Indicator Properties'.
There, you can change the lookback periods or design of the chart.
How to Trade With It- General Idea
Here is an example of a short trade on EUR/USD using the XMR Indicator. Notice how the blue bars mark when price is overbought (OB), and red bars mark when price is oversold (OS). The white areas of the chart mark less extreme conditions of OB and OS which range from -2 to +2. Harsher conditions measure -3 to -4 or +3 to +4. Usually when price reaches to a -3 or +3, it has ended up being a good time to enter long or short positions. A -5 and +5 are very rare, but are the best indicators when looking for a reversal.
Here is a -4 reading on GBP/USD during the crash earlier this year. A buy at that mark would have made over 1,300 pips from lows. The screener obviously works best in extreme conditions, but can also signal for potential longs or shorts above +2 or below -2.
The purpose in making this scanner was to help traders see one of the strategies our team uses. We believe this to be very helpful and accurate for traders of all levels, who like to trade on mean reversions or reversals. Not every indicator is perfect, but they can be used as tools for insight on any kind of market you want to trade. This scanner is meant to help the user gauge their trade or alert them when prices enter a new territory of overbought or oversold. Overall, it's a great tool and hopefully our users will find it helpful as well.
Hope you all enjoy it! We will be using this tool in action for more of our trades so stay tuned!
Thanks for reading! If you are interested in joining our trading community, we have chat rooms, trade alerts from our top traders, and educational content. You can join using the link below, and get a discount on your membership.
Please note that this email is my personal opinion only. I am not a licensed financial advisor, and any information shared or discussed is not to be construed as investment advice. Trading and investing involves a degree of risk, and is not suitable to all investors. Please consult with your financial advisor before making any sort of investment decisions.
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