Expansion/Contraction Indicator (ECI) [Angel Algo]

22 ago 2023

INTRODUCTION
The Expansion/Contraction Indicator (ECI) is a custom indicator designed to measure the expansion or contraction of price ranges between the open and close of each bar. It helps traders identify periods of increased or decreased volatility in the market. Since trading is most fruitful during volatile market conditions, this indicator provides valuable insights into when volatility increases, signaling the opportune moments to take action.


HOW TO USE

Expansion: When the ECI value is in the green zone, it suggests an expansion in price ranges, indicating increased volatility. This may be a potential signal for traders to expect trend movements or breakouts.
Contraction: When the ECI value falls outside the green zone, it indicates a contraction in price ranges, implying reduced volatility. This may signal potential consolidation or ranging periods in the market.
During contraction periods, it is advisable to exercise patience and await clear signals. Market cycles dictate that low-volatility contractions are often followed by high-volatility expansion periods, presenting opportunities for significant price movements.

Visualization:
Expansion Area: the area on the indicator chart filled with green. It has duller and brighter parts that indicate the level of expansion. The duller part corresponds to a low or beginning expansion.
ECI Dots: The ECI dots are plotted as circles on the chart. The dots are colored green if the ECI value is above the lower threshold, indicating an expansion. If the ECI value is below the lower threshold, the dots are colored red to indicate a contraction.

Alerts (Optional): The ECI indicator can generate alerts for expansions and contractions. By default, alerts are enabled. An expansion alert is triggered when the ECI value crosses above the upper threshold. A contraction alert is triggered when the ECI value crosses below the lower threshold.


SETTINGS
Period: determines the number of bars used to calculate the exponential moving average (EMA) of the price range. The default value is 14, but it can be set between 1 and 200. Higher values smooth out the indicator but may delay signals.
Lower Threshold: defines the level below which the ECI value indicates a contraction in price ranges, implying reduced volatility. The default value is 0.5.


CALCULATION
The indicator calculates the range between the open and close of each bar (ocRange). It then calculates the EMA of the range (emaRange) using the specified period. The ECI value is obtained by dividing the ocRange by the emaRange. Threshold Levels: The indicator includes two threshold levels for identifying expansions and contractions: a. Upper Threshold: Default value is 3.0. b. Lower Threshold: Default value is 0.5. The middle line (mL) represents the ECI value of 1.0, which indicates a neutral state, when the volatility in the market corresponds to its average value.