Many traders are familiar with or utilize the Relative Strength Index ( RSI ) and/or the Commodity Channel Index ( CCI ). For good reason, these classic and simple to understand indicators have made their way into many traders indicator bays with mixed results. As we often do with our trading style and indicators here at Cracking Cryptocurrency is take things that traders have used one way and attempt to view it in a different light to improve our trading efficiency and performance. That is what we have done with Parallox.
Parallox harnesses the calculations of both the Relative Strength Index and Commodity Channel Index , but through a calculation for a new breed of trader and a new market. RSI and CCI were designed to work in the stock markets of old, and their effectiveness nowadays is more-so due to the "self fulfilling prophecy" concept of so many traders using them rather then their technical applicability to any particular market or market circumstance. Moreover, because so many retail traders now utilize the RSI and CCI , trading it the traditional way, for reversals, has created a golden zone of opportunity for larger traders, institutions, and whales to come in and grab the liquidity of counter-trend retail traders basing their signals off of overbought and oversold conditions in the market utilizing RSI and CCI .
What Parallox does is quite different. Instead of relying on the readings of RSI and CCI , it looks at the value of RSI relative to the value of CCI . By looking at the convergence or divergence of these two indicators, a much more accurate reading of the directional trend can be established. No more using these oscillators to pick false tops and bottoms, instead we can utilize their relative conditions to determine market trend. Not only that, but we can identify objective signals when we cross the barrier between convergence and divergence, therefore giving us clear buy and sell signals for any trading asset.
However, we haven't left reversal traders completely by the way side. What is often an "entry" point for reversal traders, when one has determined that the particular direction of the market is at it's extreme, is where Parallox crosses back the other way, identifying an "overbought" and "oversold" region of sorts, from which we can utilize as an exit indicator when in deeply profitable trending trades.
How to Use
Using Parallox is quite simple. It can be utilized as an Initiator or Confirmer, or also as a longer-term directional marker on any time frame. In it's most simple form, the Parallox Line will cross zero from below and the line will turn green. This is an indication that the market has moved from a bearish zone of control to a bullish zone of control, and can be viewed as a potential buy signal. Conversely, when the line crosses zero from above, the line will turn red, indicating the opposite and can be viewed as a potential short sell signal.
For exit indications in strongly trending markets, when the line goes below the lower dashed line when bearish , and above the upper dashed line when bullish , and comes either back below or back above, those can be seen as trend exhaustion signals and often represent great moments to take profit or to go flat in the market until another trend establishes itself.
Let's take a look at the settings of Parallox.
First, we can input the look back length we want for our RSI and CCI indicators. You will notice that the defaults are unnatural, that is because they are tuned specifically for the BTC USD market. When trading a different asset, you will want to experiment with the optimum look back length for the best signals.
We then take a moving average of our indicators to have plotted values to work with. As above, the look back lengths for the two moving averages are optimized for BTC USD. The same caveats for optimization apply.
Then we can select the smoothing, or type of moving average we wish to utilize. Parallox performs well with different types of moving average smoothing, and I recommend that you experiment with your style of trade to find the signals that best suit your trading system.
We can also select the source of our indicator values. By default, this is hl2 , which I find to be the best for most indicators, in a close tie with hlc3.
Please let me know of your success stories, as well as any features you think would be helpful to add. If you notice any errors within it, please notify me so I can fix them. Trade Safely.