WaveTrend: a channel oscillator smoothed into a cycle reading

What it measures

WaveTrend measures how far the typical price sits from its own exponential average, scaled by how far it typically sits from it, then smooths the result twice.

The scaling is what makes it bounded and comparable across instruments: it is a distance expressed in units of normal distance rather than in price.

The output behaves like a cycle oscillator, spending its time rotating between extremes rather than trending.

That rotation is the assumption and also the weakness. A market that trends without rotating leaves the indicator pinned, and every crossover it produces in that state is a signal to fade a move that is not fading.

How it is calculated

These are the steps Basis performs, verified against the published definition.

1. 1

   Compute an exponential average of the typical price over the channel period.

2. 2

   Compute an exponential average of the absolute distance between typical price and that average — the normal deviation.

3. 3

   Divide the current distance by a fraction of the normal deviation to get a scaled reading.

4. 4

   Smooth that twice; the second smoothing is the signal line.

Settings

A channel period around ten with an average period around twenty-one is the common setting. The channel period controls what counts as "normal distance" and is the parameter that actually changes behaviour; the average period only decides how far the reading is smoothed before it is drawn.

How to read it

• Crossings of the two lines inside the extreme zones are the standard trigger and are considerably cleaner than crossings in the middle.
• The extremes are conventionally set near plus and minus sixty, but they are not hard bounds — violent moves exceed them.
• Divergence against price at an extreme is the setup most people run it for.
• The two lines are the same series smoothed to different degrees, so their crossing is a statement about acceleration rather than about level.

Where it misleads

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