VMDivergencesTH Volume Momentum Divergences - How It Works
🎯 Overview
This indicator detects divergences between price action and a custom momentum oscillator. Divergences occur when price moves one direction while momentum moves the opposite direction — often signaling potential reversals or trend continuations.
⚙️ The Hidden Oscillator Engine
The oscillator runs in the background (not plotted on chart) and combines two components:
Component 1: Momentum (MACD-style)
Momentum = Fast EMA(12) - Slow EMA(26)
Measures the difference between a fast and slow exponential moving average. Positive = bullish momentum, Negative = bearish momentum.
Component 2: Bollinger Band Distance
Distance = (Price - BB Middle) / Standard Deviation
Measures how far price has strayed from its "normal" range. Values > 2 = overbought territory, Values < -2 = oversold territory.
Hybrid Blend
Final Oscillator = (Normalized Momentum × Blend) + (Band Distance × (1 - Blend))
The Momentum Blend setting (default 1.0) controls the mix:
1.0 = Pure momentum (like MACD)
0.0 = Pure band distance (like Bollinger %B)
0.5 = Equal blend of both
🔍 Pivot Detection
The indicator identifies swing highs and swing lows on both:
Price (using high and low)
Oscillator (using the hybrid oscillator value)
How Pivots Are Found
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Swing High = A bar where the high is higher than X bars on BOTH sides
Swing Low = A bar where the low is lower than X bars on BOTH sides
The Swing Strength setting (default 5) controls how many bars on each side are required:
Lower values (2-3) = More pivots, more signals, more noise
Higher values (7-10) = Fewer pivots, fewer signals, higher quality
🔀 Divergence Types Explained
1. 🟢 Regular Bullish Divergence (Reversal Signal)
Price: Lower Low ↘ (making new lows)
Oscillator: Higher Low ↗ (momentum improving)
Meaning: Price is falling but momentum is building. The selling pressure is weakening — potential bottom forming.
Visual: Green triangle below bar + solid line connecting lows
2. 🔴 Regular Bearish Divergence (Reversal Signal)
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Price: Higher High ↗ (making new highs)
Oscillator: Lower High ↘ (momentum fading)
Meaning: Price is rising but momentum is declining. The buying pressure is weakening — potential top forming.
Visual: Red triangle above bar + solid line connecting highs
3. 🟡 Hidden Bullish Divergence (Continuation Signal)
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Price: Higher Low ↗ (holding above previous low)
Oscillator: Lower Low ↘ (momentum dipped)
Meaning: In an uptrend, price made a higher low but oscillator made a lower low. The oscillator "reset" while price held strong — trend likely to continue UP.
Visual: Green diamond below bar + dashed line
4. 🟠 Hidden Bearish Divergence (Continuation Signal)
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Price: Lower High ↘ (staying below previous high)
Oscillator: Higher High ↗ (momentum bounced)
Meaning: In a downtrend, price made a lower high but oscillator made a higher high. The oscillator bounced but price couldn't — trend likely to continue DOWN.
Visual: Red diamond above bar + dashed line
5. 🔵 Double Bottom with Divergence (Strong Support)
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Price: Two lows at SIMILAR levels (within ATR tolerance)
Oscillator: Second low HIGHER than first
Meaning: Price tested the same support twice, but momentum was stronger on the second test — buyers defending that level aggressively.
Visual: Cyan circle below bar + dotted line
6. 🟣 Double Top with Divergence (Strong Resistance)
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Price: Two highs at SIMILAR levels (within ATR tolerance)
Oscillator: Second high LOWER than first
Meaning: Price tested the same resistance twice, but momentum was weaker on the second test — sellers defending that level.
Visual: Purple circle above bar + dotted line
✅ Validation Filters
Not every pivot pair creates a signal. The indicator applies filters:
Filter Purpose
Min Pivot Distance (default 5) Pivots must be at least 5 bars apart — prevents micro-divergences
Max Pivot Distance (default 50) Pivots must be within 50 bars — prevents stale/irrelevant divergences
DTB Tolerance (default 0.3 × ATR) For double top/bottom, price levels must be within 30% of ATR
📊 Visual Elements
Element Description
Markers Shapes above/below candles when divergence triggers
Lines Connect the two pivot points involved in the divergence
Labels Text tags showing divergence type (REG, HID, DBL)
Glow Effect Thicker semi-transparent line behind main line
Background Flash Brief color flash on signal bar
Status Panel Real-time table showing oscillator value and active signals
🧠 Trading Logic Summary
┌──────────────────────────────────────────────────────────┐
│ DIVERGENCE CHEAT SHEET │
├──────────────────────────────────────────────────────────┤
│ REGULAR BULLISH │ Price ↘ Osc ↗ │ Look for LONGS │
│ REGULAR BEARISH │ Price ↗ Osc ↘ │ Look for SHORTS │
│ HIDDEN BULLISH │ Price ↗ Osc ↘ │ Add to LONGS │
│ HIDDEN BEARISH │ Price ↘ Osc ↗ │ Add to SHORTS │
│ DOUBLE BOTTOM │ Same low, Osc ↗ │ Strong SUPPORT │
│ DOUBLE TOP │ Same high, Osc ↘ │ Strong RESISTANCE │
└──────────────────────────────────────────────────────────┘
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