This indicator measures the degree of acceleration of price, as well as how overbought or oversold it has become over time. It then colours the price bars based on its signals and calculations.
The Axelx indicator uses a combination of multiple oscillators and indicators (such as RSI, Keltner channels and ADX) which can be useful in identifying the degree of overbought and oversold conditions. When two or more of these indicators become overbought (or oversold) the indicator provides a signal e.g. coloured signals from blue, yellow, orange, red to purple – in order of intensity of signal. The more indicators that agree on “overbought” or “oversold” – meaning the greater the combination of indicators that signal overbought/oversold – the greater the importance of the signal. One of the most important features of the indicator is measuring the distance and speed the price has moved away from its averages. For example, if price has dropped and moved too fast away from its 200 moving average, and price is also oversold and overextended (e.g. overstretched), this could be a strong indication that we are reaching “capitulation” territory – meaning an area where price may have a high probability of bouncing back. Similarly, if price has rallied parabolically too fast and very far away from its 200 moving average, and price is overbought and overextended, this may indicate a potential “blow off top” formation – a dangerous situation that is often unstable and usually precedes major corrections or reversals.
Therefore, knowing when price has reached a level of extreme acceleration as well as being extremely overbought/oversold can be very useful in chart analysis. The weakest signal is BLUE, followed then by YELLOW and ORANGE. The stronger signals are Red, DARK RED, MAGENTA and PURPLE, in order of increasing strength. We prefer to only focus on the red, dark red, magenta and purple signals – as they typically have the highest probability.
The indicator also has a feature to increase the strength of the signal – from OFF to STRONG to VERY STRONG. By default, the indicator is set to VERY STRONG – this is the highest and most strict setting. But it can be relaxed if required on certain charts. By changing the setting from OFF to strong and very strong, the indicator waits for greater degree of extreme signals or more combinations of overbought (or oversold) conditions before showing a signal. Choosing the strong and very strong settings also sets the parameters of the indicator to much more strict criteria – so the frequency of the signals can often reduce. We have also included an “extreme strict” FILTER which is ticked by default in the settings. This filter waits for the price to show some sign of a turning or reversing before showing a signal. By applying this filter, the indicator will wait for the price to move in the opposite direction and close beyond a moving average (e.g. the 8 linear weighted moving average) before showing the most recent and highest recorded signal (e.g. red or magenta). For example, if price has been dropping very fast and is oversold, and let’s say the indicator is showing a RED signal, then by applying the filter the indicator will wait until price has closed ABOVE the 8 linear weighted moving average before showing a signal. This typically increases the probability of the price having reversed – although the risk of a false signal still exists and it is possible for the price to still fall further lower. Risk protection is therefore needed. Generally we prefer to apply the FILTER in all market conditions and on all charts and timeframes.
For charts of ETFs, indices, commodities and currencies and most markets which have moderate to low volatility – the AxelX setting can be switched to OFF on the higher timeframes like daily, weekly and monthly - (but this is optional and the stronger settings can be applied if required). For timeframes which are lower than 240min (e.g. 60min, 15min or lower) it is ideal to use the STRONG or VERY STRONG settings due to the higher volatility. The extreme strict filter can be applied too. For charts of cryptocurrencies, individual stocks and on any timeframes lower than 240 min (e.g. 60min, 15min or lower) it is better to apply the STRONG and VERY STRONG settings as these price charts can often become very parabolic. The extreme strict FILTER (mentioned above) must also be applied to potentially further increase the odds. The indicator also incorporates the key moving averages that we find the most useful and powerful – namely: 8 EMA, 21 EMA, 34 EMA, 50 SMA, 100 EMA and 200 SMA. We have also included the 5 SMA, 144 SMA, 100 SMA and 55 EMA. The reason why these moving averages can be useful is for several reasons: (1) they can act as support or resistance – specially the 21, 34, 100 EMAs plus the 50 and 200 SMAs. For example, in an uptrend, these moving averages are levels that often get tested by price during a pullback, e.g. they can act as levels where price usually move towards, bounce from and continue the uptrend (the same applies in reverse during a downtrend). The 50 and 200 SMAs can often be considered as a “threshold” between bear and bull markets (for example, when price is above the daily 200 SMA, it is more likely to be in a bull market).
Most of the key moving averages are chosen due to being fibonacci numbers or sequences – such as the 5, 8, 21, 34, 55 and 144 – which makes them less arbitrary. The further away price gets from these key averages, the more likely it is that price can “snap back” to them (i.e. a reversion to the mean). The crossing of two moving averages – such as the 8 and 21 EMAs – can also be useful to determine the direction of momentum or likely trend. These moving averages can be applied to any chart or timeframe, but we prefer to apply them mostly to higher timeframe charts such as daily, weekly and monthly (the hourly and 240-minute can be useful too).
Chartists should be aware of the probabilistic and uncertain nature of price action and the markets, and therefore prepare to limit and control any potential risks. If you would like access, please send me a PM on Tradingview.