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Mean Reversion Indicator: User Guide

Link on TradingView: Mean Reversion Indicator [CTH] by CryptoTradesHub on TradingView

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

  • RSI: Detects overbought/oversold conditions.
  • Bollinger Bands: Identify volatility and potential price reversion points.
  • Long-Term MA: Establishes the overall market trend to guide trades in the direction of the dominant trend.

Failed Volatility Breakouts (FVBO)

  • Hypothesis: Detects price setups where Bollinger Bands fail to maintain a breakout, signaling potential reversals.
  • Visual Representation: FVBO signals are shown with arrows and color-coded candles for easy identification.

RSI Divergences

  • Bullish Divergence: Occurs when price decreases while the RSI increases, indicating a potential upward reversal.
  • Bearish Divergence: Occurs when price increases while the RSI decreases, indicating a potential downward reversal.

Trade Setups

Long Position

  1. Check MA Direction: Ensure the long-term MA is below the price candles, indicating an uptrend (colored blue).
  2. Identify FVBO: Look for a blue candle with an arrow below the price, indicating a FVBO Long setup.
  3. RSI Oversold: Confirm the RSI is in oversold territory.
  4. Exit Point: Aim for the mid/upper Bollinger Band as the target.

Short Position

  1. Check MA Direction: Ensure the long-term MA is above the price candles, indicating a downtrend (colored red).
  2. Identify FVBO: Look for a red candle with an arrow above the price, indicating a FVBO Short setup.
  3. RSI Overbought: Confirm the RSI is in overbought territory.
  4. Exit Point: Aim for the mid/lower Bollinger Band as the target.

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.

For more details, visit the Mean Reversion Indicator [CTH] by CryptoTradesHub on TradingView.