Buying Selling Pressure
The original idea behind the code is taken from http://karthikmarar.blogspot.com/On the above link, you can see two lines one is green and another is red. Greenline represents
buying pressure and red represents selling pressure. Cross over of these two
lines can be used as a signal for buying and selling. you can see that it has
crossed over here and prices have started rising.
But one indicator is not always enough to have good buy
/sell signals. We can use this with RSI or any other indicator for refining
signals. The value of buying and selling pressure is always more than 0.
Now we come to the algorithm or logic behind this
indicator. Firstly this takes the lookback period as one of its inputs. I have used
14 period as look back period. In simpler terms, I have considered last 14
bars for calculation of buying selling pressure, you can always change it to
any other suitable number based on your experience or time frame in which you
are working.
In the candlestick chart, you would have seen tail which is
formed either at the top of the bar or bottom of the bar. The tail is formed at
the top of bar when prices go up and come down due to selling pressure in the
given timeframe of bar. Similarly tail is formed at the bottom of the bar when
prices go down and quickly come up due to increased buying activity. The level
of activity is captured in the volume and length of the tail.
Taking this clue, we define buying pressure as the length of the bottom tail till close and selling pressure as tail at the top of the bar till close value.
we can use a lookback period of 14 periods to smoothen the
data and to get a trend.
in mathematical terms or coding terms
Buying Pressure(BP) =
Close - Low
Selling Pressure (SP)= High – Close
the above is for one bar, but we need average for last 14
periods i.e. the lookback period.
so we can take EMA of BP and SP for last 14 days like
BP average =EMA(BP,14)
SP average = EMA(SP,14)
Now, we will compare the buying pressure of the current bar with
average buying pressure. Similarly, I will compare selling pressure of current
bar with average selling pressure, this can be done in many ways, but the
best way is to take percentage. we will define it as normalized buying
pressure and normalized selling pressure and denote them by NBP and NSP
so NBP = BP/BPaverage
and NSP =SP/SPaverage
till this point I guess everyone would be able to follow,
now keep focus and see what we are doing next. We will try to include volume
in this. It is necessary as one may have a long bottom or top tail but without
much volume then this has no meaning.
For this, we can calculate the average volume of the last 14 periods
and compare the same with the current volume. like
NV = volume/EMA(Volume,14)
We have intentionally made volume in this way so that the
order of NBP and NSP are comparable with NV. Value of all of these would be
above 0 and would seldom cross 1. Why it would seldom cross one ? This is because the volume would once in a while cross average volume of 14 days and when it
will cross it will be more than 1. In case, the volume suddenly becomes double the average volume the value of NV will be 2.
Now, we can multiply NV with NBP and NSP to incorporate
volume in our buying selling pressure indicator.
Further, to make it smooth, I have again taken EMA
so the indicator function
nbf = EMA(nbp * nv,14)
nsf =EMA(nbp * nv,14)
Having understood logic behind the indicator it would be
easy for us to code in PINE SCRIPT.
Summary
Learn to make indicators and strategy in PINESCIPT at Creating Trade Strategies and BackTesing using PINESCRIPT on UDEMY.
Cross overs seems to be a good option for the generation of buying selling signals. We will also need one another indicator to refine buying selling signals generated from this code.
