WaveTrend 4D with GDM + QMC (Professional Edition) 🌸 "📡 Signal Provider" in GoemonYae Trading System (GYTS) 🌸
WaveTrend 4D (WT4D) is an extension of the incredible WaveTrend 3D (2022, Justin Dehorty). This oscillator elevates the classic WaveTrend by integrating advanced mathematical models for a multi-dimensional view of market momentum, capturing subtle shifts and trends that traditional indicators might miss. Each oscillator layer uses a combination of normalised derivatives, hyperbolic tangent transformations, and dual-pole filtering (John Ehlers' SuperSmoother), providing a normalised and smooth signals.
WT4D strives to help discriminating high-quality signals from the indicator by introducing the Gradient Divergence Measure (GDM) and Quantile Median Crosses (QMC) -- see below for more information.
WaveTrend 4D is a "📡 Signal Provider" in the 🌸 GoemonYae Trading System (GYTS) 🌸. Multiple 📡 Signal Providers connect to a GYTS "🧬 Flux Composer" to find confluence. On its turn, the Flux Composer can be connected to the GYTS "🎼 Order Orchestrator" for backtesting and trade automation. However, WaveTrend 4D is a wonderful indicator on its own as well.
🌸 --- MAIN FEATURES --- 🌸
- The focus is on two type of signals: divergences between the overall trend and the waves (GDM) and the weakening of strong trends (QMC) - The name "WaveTrend 4D" is derived from the usage of 4 dimensions, representing different frequencies or timeframes. This gives the opportunity to use 2 sets of 3 frequencies to find divergences. Next to the "fast", "normal" and "slow" frequency, the fourth frequency is called "lethargic" (very slow). - High probability trading involves diligently determining the significance of signals. For this purpose, a novel "Gradient Divergence Measure" (GDM) is developed to signify the strength of divergence signals and are drawn as triangles next to the divergence circles. - Another and powerful approach is to use the frequencies' crossing of the median (zero) line. We seek to only signal reversals after a significant trend, and call this the "Quantile Median Crosses" (QMC).
More information the GDM and QMC and details of all features are described below.
💮 Introduction -- The GDM dynamically calculates a composite measure based on multiple factors. Unlike traditional binary divergence indicators, GDM employs a continuous value system to capture the nuanced dynamics of market behaviour. This methodology allows traders and analysts to assess the potency of divergence signals with greater precision, facilitating more informed decision-making processes.
💮 Methodology -- The GDM is calculated using a composite formula that integrates various market dynamics. At its core, it consists of six components listed below, each weighted to optimize the indicator's responsiveness to market conditions:
The magnitude of relative change between waves -- A larger difference between the waves, i.e. lower high or higher low could signify a stronger divergence.
The absolute value of the latest wave -- The strength of the latest wave provides insight into the extremity of the market conditions.
Slope of the divergence -- The slope between the two points of divergence essentially measures the rate of change in the frequency\'s value over time. It captures both the direction and the steepness of the indicator’s move between two waves.
The magnitude of relative change of the price -- A divergence means that the oscillator shows an opposite pattern than price action. Thus, if the price makes a significantly higher high or lower low, but the indicator does not, this discrepancy can be used to measure the divergence strength. This components measures the price's extrema during the crosses of the indicator's waves.
Higher timeframe's frequency trend -- Similarly, instead of looking at the price directly, this component measures the more general trend of the price by using the higher timeframe frequency (i.e. the slow frequency when looking at divergences of the normal frequency).
Time duration -- Lastly, the time duration between the two points of a divergence can also be a factor. A divergence that spans over a longer period might indicate a more significant market sentiment shift.
Note that these 6 components are not independent, e.g. the slope is actually the result of the magnitude between waves, the absolute value and time duration. However, the default GDM is carefully tuned to include all these features without being too sensitive to outliers.
💮 Tuning the GDM -- At the same time, different people have different ideas of what factors are important to denote a "strong" divergence. For this reason, in the 🧰 Professional Edition of this indicator, as opposed to the 🤲 Community Edition, the user can select between different "GDM profiles" that resemble a certain approach:
Upon initiating the GDM indicator, users are prompted to select one of six distinct profiles. Each profile adjusts the indicator’s parameters to optimize performance under different market scenarios:
balanced: Offers a general approach, with a balanced assessment of market conditions without specific focus on any one aspect.
regular divergence: Emphasises price action, ideal for identifying classical divergence patterns where price and momentum diverge.
wavetrend focus: Minimises the influence of price action, concentrating on the WaveTrend oscillator’s behaviour for trend analysis.
short-term waves: Prioritises the slope of the waves, targeting traders interested in short-term market movements and potential inflection points.
long-term waves: Extends the analysis period, focusing on longer-term market trends and wave duration for strategic positioning.
overbought/oversold: Highlights extreme conditions in market valuation, useful for identifying potential reversal points from overbought or oversold levels.
Another way of tuning the GDM is to dial in the "sensitivity". This controls the extent of normalisation between signals, and essentially affects how often strong GDMs appear. At the conservative end (higher sensitivity), the strong GDMs are less frequent but are relatively significant, while with a lower sensitivity the strong GDMs appear more frequent.
💮 GDM on the Oscillator -- Coming back to the indicator, the GDMs are represented by triangles and their value represents the strength. A value close to `1` signifies a strong bearish divergence and thus a possible reversal of continuation of a downtrend. Similarly, a value close to `-1` signifies a strong bullish divergence.
Note that there are two colour sets which can be enabled and disabled. One uses crosses between the fast and normal frequencies (with the slow frequency acting as the price trend with which there should be an opposite interaction -- "divergence"). Similarly, crosses between the normal and slow frequencies (with the lethargic (the most slow) frequency acting as the price trend) are used to find divergences on a higher timeframe.
🌸 --- QUANTILE MEDIAN CROSSES (QMC) --- 🌸
💮 Introduction -- A different and powerful approach is to use the frequencies' crossing of the median (zero) line. This would signify a continuation of the reversal. However, also here, not all of those crossings would be trades with a high probability of success. For this reason, we seek to only consider reversals after the most strong trends start to show weakness. We call these reversals the "Quantile Median Crosses" (QMC), derived from the methodology.
💮 Methodology -- To find this "most strong trends", we calculate the integral ("the area") of a frequency between all historical median crosses, and take an upper quantile of those integrals. This means that when the series is crossing the median in often (consolidation), the ares between those crosses would be small. But if there was a strong momentum, and the series would separate itself significantly from the median and would do so for a long time, its area would be large.
So after considering all the past integrals, we take the upper quantile of those (i.e. sort all integral and for example take the top 5%) and if the latest trend's integral was in this upper quantile, it is considered "significant". Hence, the name "quantile" in the name "Quantile Median Cross"
The second important aspect is that for the 🤲 Community Edition, there are two versions of this 📡 Signal Provider: one that has the GDM feature and another the QMC feature. Besides that, the list below depicts a fairly complete overview of all the features across different versions:
( __ 🧰 __ ) GDM profiles -- As mentioned, the GDM is carefully tuned and we consider it an excellent method to signify the strength of a divergence. Therefore, the standard calculation in the Community Edition is sufficient. Nevertheless, the Pro Edition has profiles (as previously described) so the user can select how (s)he feels a "strong divergence" should be.
( __ 🧰 __ ) QMC sensitivity -- Similar to the GDM profiles, in the Pro version there are presets to make the sensitivity higher (and thus get more signals) or lower.