David Varadi Oscillator – Rules, Settings, Strategy, Returns
In trading, there are times, especially for swing trading, when we may want to focus on individual price swings rather than the trend — one indicator that can help with that is the David Varadi Oscillator. What do you know about this indicator?
Named after the person who proposed it, the David Varadi Oscillator (DVO) is a leading indicator that aims to reduce the influence of the trend component in oscillators so as to track price swings more effectively. Not to be confused with the David Varadi Intermediate Oscillator (DVI), the DVO is a rolling percent rank of detrended prices over a chosen lookback period.
In this post, we will take a look at most of the questions you may have about the David Varadi Oscillator: what it is, how it works, and how you can use it to improve your trading strategies. Read on!
Key takeaways
- Definition and Purpose:
- The David Varadi Oscillator (DVO) is a leading indicator designed to track price swings by reducing the influence of trends in oscillators.
- It should not be confused with the David Varadi Intermediate Oscillator (DVI).
- Key Features:
- The DVO is a rolling percent rank of detrended prices over a chosen lookback period.
- It uses a simple method to detrend prices, making cyclical patterns and price swings more apparent.
- Detrending Process:
- Involves an n-period simple moving average of the ratio between the closing price and the median price (average of the high and low).
- Customization:
- Platforms often provide default lookback period settings, but users can adjust these to fit their trading strategies and markets.
- Applications:
- Similar to the RSI, the DVO helps traders identify buy opportunities after pullback swings and sell opportunities at the end of impulse swings.
- We show you a complete David Varadi Oscillator trading strategy complete with trading rules.
- If you want to look at other indicators, please read our take on the technical indicators list.
What Is the David Varadi Oscillator?
Named after the person who proposed it, the David Varadi Oscillator (DVO) is a leading indicator that aims to reduce the influence of the trend component in oscillators so as to track price swings more effectively. Not to be confused with the David Varadi Intermediate Oscillator (DVI), the DVO is a rolling percent rank of detrended prices over a chosen lookback period.
It uses a simple method to detrend prices so that the cyclical pattern or oscillating price swings would become clearer. The detrending process involves an n-period simple moving average of the ratio between the closing price and the median price (the average of the sum of the high and low).
Although many platforms have a default setting for the lookback periods of the percent rank and the moving average used for detrending, users can adjust the settings to what suits their strategies and the markets they are trading. The purpose of the DVO is to track price swings, just like the RSI. So, traders can use it to find opportunities to buy after a pullback swing and sell at the end of an impulse swing.
On a chart, the David Varadi Oscillator might look like this (see the lower pane):
David Varadi Oscillator trading strategy – rules, backtest, returns, and performance
Let’s backtest a David Varadi Oscillator trading strategy complete with trading rules.
We make the following trading rules:
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Below is the equity curve for Gold (GLD) from its inception until today:
Below is the equity curve for S&P 500 (SPY) from its inception until today:
Trading statistics, returns, and performance (including commissions and slippage) for S&P 500 (SPY):
- Number of trades: 172
- Average gain per trade: 0.5%
- Annual returns (CAGR): 2.5%
- Win rate: 60%
- Time spent in the market: 7%
- Risk-adjusted return: 338%
- Max drawdown: 11%
This is the code we used for the backtest (Amibroker):
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How Does the David Varadi Oscillator Work?
The David Varadi Oscillator works as a detrended price oscillator that attempts to track individual price swings and predict their potential turning points. It works like the RSI in that it attempts to find opportunities to profit from individual price swings, rather than the entire trend. So, in the right market condition, it can help you to buy a market dip in an uptrend and sell a rally in a downtrend.
The DVO makes use of detrended price data in its calculation. To detrend the price data, it uses the simple moving average of the ratio between the closing price and the median price or midpoint of the price range for each period. That is, it finds a ratio between the closing price and the average of high and low prices and then uses an n-period simple moving average to smooth out noise. The percentage rank of this average ratio over an n-period data is run and the value is multiplied by 100 to convert it to a percentile.
Thus, the indicator’s values range from 0 to 100, representing the percentile rank of the average ratio. A rank of 10 means that the average ratio is in the 10th percentile of the average ratios over the ‘n’ periods and a rank of 97 means a 97th percentile. Think of it like the percentile score of people’s heights or students’ standardized tests. A rising rank value of the DVO suggests an upswing in price, while a falling value indicates a downward price swing.
Why Did David Varadi Create This Oscillator?
David Varadi created this oscillator to reduce the influence of the trend component in oscillators so as to track price swings more effectively. As with most other time series, the price time series has both the trend component and the cyclical component, as well as random noise. In conventional oscillators, like the RSI, the trend component affects the oscillator component, which is why the RSI can stay in an overbought and oversold zone for a long time in a strong uptrend and downtrend respectively.
David Varadi wanted an oscillator that reduces the effect of the trend so as to display the cyclic nature of the price swings more clearly. He achieved this by using detrended price data in the calculation of the oscillator.
How Do You Calculate the David Varadi Oscillator?
Calculating the David Varadi Oscillator requires using detrended price data and finding a rolling percent rank of the detrended prices over a chosen lookback period. The detrending process uses an n-period simple moving average of the ratio of the closing price to the midpoint (median) of the price range. Here are the steps in calculating the indicator:
- Calculate a ratio of the closing price to the median price (the average of high and low prices).
- Calculate an n-period simple moving average (SMA) of the ratio to smooth out noise
- Get a running percentage rank of this average ratio over an N-period
- Multiply the rank value by 100 to convert it to a 0-100 quantity
As you can see, there are two lookback periods in the calculation. In most platforms, the same number of periods are used for both as the default setting. In TradingView, for example, the lookback period for the SMA is 14 periods and that of the running percentage rank is also 14 periods.
What Makes the David Varadi Oscillator Unique?
What makes the David Varadi Oscillator unique is that it tries to reduce the effect of the trend component of the price time series from the oscillator. It does this by using detrended price data in its calculation. The indicator detrends the price data using an n-period SMA of the ratio of the closing price to the median price (the average of high and low prices).
Detrending the price data leaves the DVO with the cyclical component. Thus, unlike conventional oscillators, such as the RSI, the DVO does not stay overbought or oversold for a long time in a strongly trending market. It simply shows the cycles of price swings.
How Can You Use the David Varadi Oscillator for Trading?
To use the David Varadi Oscillator for trading, you must combine it with other indicators or other forms of analysis that can show you the market structure and the direction of the trend. Your aim should be to use the DVO to time your entry in the direction of a trend.
For example, if the market is trending upward, you can use the DVO to time your entry when the price pulls back to a strong support level. You go long once the DVO starts rising after the price has reached the support level.
What Are the Main Components of the David Varadi Oscillator?
The main components of the David Varadi Oscillator are as follows:
- The detrended price data: Detrending helps reduce the effect of trends in the price data. This is achieved by obtaining the ratio of the closing price to the median price (the average of the high and low prices).
- The smoothened average ratio: The noise in the detrended price data is removed by applying an n-period simple moving average to the ratio. This gives an average ratio for each period.
- The percentage rank: This is a rolling percentage rank of the average ratio over a chosen lookback period to know the percentile the data falls into. Rising values indicate an upswing and falling values indicate a downswing.
How Do You Interpret the David Varadi Oscillator Signals?
To interpret the David Varadi Oscillator signals, you have to understand what the indicator’s behavior tells you in the context of the price action and market structure. The indicator aims to show the cycles of individual price swings without the trend.
Thus, its signals must be interpreted in light of the trend direction and key market levels. Rising values suggest that a bullish price swing is emerging if the market is in an uptrend and the price is at a key support level. Likewise, falling values suggest an emerging downswing if the price is at a key resistance level in an already-existing downtrend.
What Are the Key Advantages of the David Varadi Oscillator?
The key advantages of the David Varadi Oscillator include:
- The price data used in its calculation are detrended, which reduces the effects of the trend from the oscillator.
- The oscillator simply shows the cycles of price upswings and downswings
- It does not stay in the overbought zone for a long time in a strong uptrend
- It does not stay in the oversold zone for a long time in a downtrend
- It can be used to time entry and exits to capture individual price swings in a trend
How Does the David Varadi Oscillator Compare to Other Indicators?
Compared to other indicators, the David Varadi Oscillator uses detrended price data to find a rolling percentage rank over a chosen period. When the rank values are plotted, it displays the cycles of price swings regardless of where the price is trending and how strongly it is trending.
This is unlike other indicators, especially oscillators, which are affected by the trend. The DVO doesn’t stay long in overbought or oversold zones irrespective of the strength of the trend, unlike other indicators like the RSI and stochastic.
Can the David Varadi Oscillator Help You Find Entry Points?
Yes, the David Varadi Oscillator can help you find entry points if used the right way in the right market context. It is important to formulate a strategy with clear entry rules and backtest it to be sure that it works. However, the general idea is to use a trendline or a moving average to identify the direction of the trend and use support and resistance levels or round numbers to find key levels of support and resistance.
In an uptrend, the DVO can show entry points for long positions at key support levels if the value is rising. Similarly, in a downtrend, can show entry points for short positions at key resistance levels if the value is falling.
How Is the David Varadi Oscillator Used in Different Markets?
The David Varadi Oscillator is used in different markets according to the direction of the trend, and its signals are best traded at the corresponding support or resistance level, as the case may be. In an uptrend, you only look for a buy signal (rising DVO values) to go long at key support levels. Similarly, in a downtrend, you look for sell signals (falling DVO values) to take short positions at key resistance.
If the market is range-bound, you may look for sell signals at the resistance level of the range and buy signals at the support level of the range.
What Are Common Mistakes When Using the David Varadi Oscillator?
The common mistakes when using the David Varadi Oscillator include:
- Not having a reliable trading strategy with clear entry and exit rules
- Using the indicator alone as a standalone trading strategy
- Not using other indicators or price action analysis to identify the trend and trade along that direction
- Not having a robust risk management plan
How Do You Optimize the David Varadi Oscillator Settings?
To optimize the David Varadi Oscillator settings, you have to first create a trading strategy with the indicator. Next, you backtest the strategy, experimenting with different settings to find the one that offers the best performance.
Then, you retest the new settings on different historical data (out-of-sample data) or in a real-time market to be sure the new settings are robust enough to perform well with the new data. This helps to avoid curve fitting.
What Timeframes Work Best With the David Varadi Oscillator?
The timeframes that work best with the David Varadi Oscillator will depend on your trading style and backtesting results. If you are a day trader, you will like to trade on intraday timeframes, such as the hourly, 30-minute, or 15-minute timeframe.
Your backtesting results will tell you which of those timeframes offers the best performance. Likewise, your backtesting results will show you the best timeframe for swing trading your strategy if that is your trading style.
Can the David Varadi Oscillator Predict Market Trends?
No, the David Varadi Oscillator cannot predict market trends because it is based on detrended price data. The whole essence of the indicator is to reduce the effects of the trend on an oscillator so as to show, more clearly, the cyclical patterns of individual price swings.
As such, the DVO does not predict market trends but can show when a new price swing is emerging in either direction.
How Do You Combine the David Varadi Oscillator With Other Indicators?
To combine the David Varadi Oscillator with other indicators, you have to know how the indicator works so you can combine it with indicators that can complement it. Being a cycle-focused oscillator, the indicator is best combined with trend indicators, such as the moving average indicator.
A moving average indicator (of an appropriate period) can show the trend direction and also serve as a dynamic support and resistance level where you can look for trade setups in the trend direction using the DVO.
What Are Typical Signals From the David Varadi Oscillator?
Typical signals from the David Varadi Oscillator are rising values, which indicate an emerging upswing in price, and falling values, which suggest an emerging price downswing. However, these signals are not to be interpreted on their own merit.
They must be used in the context of the market structure and the price trend. A rising DVO value can only signal a buy setup if it occurs at a key support level in an uptrend. Likewise, a falling DVO value can only signal a sell setup if it occurs at a key resistance level in a downtrend.
How Can the David Varadi Oscillator Improve Your Trading Strategy?
The David Varadi Oscillator may improve your trading strategy by helping you to time your entry and exit points if you already understand the market context.
You must already have a strategy that gives you the right market context before you can use the DVO to improve your market timing.
Does the David Varadi Oscillator Work Well in Sideways Markets?
Yes, the David Varadi Oscillator may work well in sideways markets if used with the right strategy. Sideways markets are often bound within a range. Shorting at the upper border (resistance level) or the range and going long at the lower border (support level) of the range can be a good strategy.
In this case, the DVO can help you time your entry accordingly at those levels.
How Does the David Varadi Oscillator Perform in Volatile Markets?
The David Varadi Oscillator does not perform well in volatile markets, as the price swings, which the indicator tracks, become highly erratic during such market conditions.
When the market is very volatile, the David Varadi Oscillator can give a lot of false signals even at key market levels.
What Are the Limitations of the David Varadi Oscillator?
The limitations of the David Varadi Oscillator include:
- The indicator does not show the direction of the market trend, as it uses detrended price data in its calculation.
- It certainly needs other indicators or price action analysis to show the market context within which its signals can be interpreted.
- It cannot be used alone to create a trading strategy.
How Do You Avoid False Signals With the David Varadi Oscillator?
To avoid false signals with the David Varadi Oscillator, you have to combine it with other indicators or other forms of analysis that can provide the real market context under which the indicator’s signals can be interpreted.
For instance, you need to know the direction of the trend and the key market levels where you can look for setups.
Is the David Varadi Oscillator Suitable for Beginners?
No, the David Varadi Oscillator is not suitable for beginners because it focuses on the cyclical price patterns at the expense of the trend.
For a beginner, the trend is always a friend. It is never advisable for a beginner to trade with indicators that do not show the trend.
Can the David Varadi Oscillator Be Automated in Trading Systems?
Yes, the David Varadi Oscillator can be automated in trading systems using the right trading algorithms. However, it may be combined with other indicators or tools to create a reliable strategy, which can then be coded into a trading algo for the automated trading system.