How to create a REGIME FILTER in Pine Script

hey traders in this lesson i want to
show you guys how to create a regime
filter
in pine script
so the concept of a regime filter is
that you get a key moving average from a
key index
so in this case i have alphabet inc or
google the google stock loaded onto my
chart from the nasdaq exchange and down
here this colored indicator you see is
telling me whenever the 20 period
daily chart
ema is above or below price action so
when the nasdaq index is trading below
its 20-day moving average this turns red
and basically what this means is if
you're trading any stock within the
universe of the nasdaq index perhaps
it's a time to be cautious because
the index is not looking healthy right
now so maybe if you are a long only
trader you want to stand aside when this
turns red or if you're a short trader
you like trading stocks to the short
side waiting for this to turn red could
be a good indication
that perhaps there is a pullback
imminent in the market this is a popular
trading filter for investors
particularly but it can be used for
traders and day traders as well but for
today's lesson i'm going to stick to the
higher time frames and treat this as
something of a
investment filter this is something i
use and employ my own investment
strategies in some of them especially in
the stock market and i'm excited to show
you guys how to code this in pine so
let's get started so here i am with
almost a blank script all i've done is
add some user inputs here to save time
we're only getting three inputs here
we're getting a time frame to base our
regime filter on we're getting a moving
average length 20 by default and the
time frame is daily by default and then
a market or symbol
in this case we're just loading the
nasdaq index by default and to do this i
use the time frame input the integer
input and the symbol input if you're not
familiar with these make sure to go back
and watch the user input lesson earlier
in the course material because now i'm
just going to move on
and start building out our regime filter
so the first thing i do in this
particular script is i actually create a
custom function
a custom security function just to save
a little bit of time and make our code a
little more readable and my function
looks something like this i started with
an f underscore so that we know it's a
function and then i just call this one f
underscore sec which is short for
security
and this is going to be a
abbreviation
of the security function which will make
it a little bit faster and easier and
more readable when we reference our
security function in this particular
script
so this custom function is going to take
three parameters
a market a time frame resolution
and an expression
so i need to define the function using
our operator here the equals right arrow
and then this function is going to pass
these three values into our request dot
security function and we need to pass in
our market first and then our time frame
and then our expression
but for our expression i'm also going to
pass in our
anti-repainting code the code that stops
our script from repainting on the
current bar
on the current real time bar
and that is our bar state
dot is real time question mark
1 otherwise 0.
so this expression will reference the
previous bar
the previous higher time frame bar so in
this case if we would use this function
to reference the daily chart on this
index
and the current bar happened to be a
real-time bar that was actively moving
then we would reference yesterday's
nasdaq closing price or whatever
expression we put in here otherwise if
it is not a real-time bar and it is a
historical bar then we just reference
the current um expression or closing
price
indicator value whatever
on that historical bar
and this stops repainting this stops the
script from
drawing from updating our expression on
the current real-time bar we always want
to reference yesterday's price action on
a real-time bar because whatever
expression we are passing in has not
been confirmed until today's bar closes
obviously there are exceptions to this
sometimes you do want to reference the
current days high or low or closed
but for this script we do not want that
so that's what this code does moving on
we need to get our ema value to do that
i just create a new variable called ema
and i'll set this to ta.ema
with a default source of the closing
price and our length input as our period
length for this moving average
and then next up we need to get our ema
value from the higher time frame to do
that i use my custom function here the f
underscore sec
open up my parentheses and then i need
to pass in the current market
or the market setting that we have
and the time frame so res
and then an expression so in this case
we need to pass in our ema value
and now because i've already included
this
historical operation here this ternary
condition that checks if we are dealing
with a real-time borrower or a
historical bar i don't need to do that
here i can just pass in the ema value
that's why i created this custom
function it makes our code a little bit
tidier and now the next thing we need to
do is check if price is above or below
our ema filter
on the
market that we are referencing as our
regime filter
so the first thing i need to do is get
the current market price
for that we are going to use the f
underscore sec function again pass in
our market our resolution but this time
we want to pass in the closing price
so this will get the closing price of
the given market on the given time frame
then we need to create a new boolean
value here or variable called filter
and this will be set to
is the market price greater than our ema
value
so is the closing price on our given
market on our given time frame trading
above our ema value for that same market
and time frame if that's true then our
regime filter will be set to true
and now the final thing that is left to
do is to change the background color of
our chart based on our regime filter so
if price is above our given moving
average we want the background to be
green otherwise we want it to be red so
let me change our plot to a bg color
function then we simply need to check is
regime fill to true
if so set the background color of our
chart to green
otherwise if our regime filter is not
true then we want to set it to red now
when i save my script we should be
getting
the colors changing on the background of
our indicator
based on whether the current index
filter is met
so if i go over to
nasdaq
ndx
and open that up
here is our nasdaq index if i throw on
an ema
and set it to our 20 period you can see
that the filter changes color based on
where the price is trading below this
moving average
or above this moving average and this
applies to any market we load so
if we load google
it's not checking if google's price is
above the 20 period moving average it's
checking if the index the overall index
is above its average so this can be a
great indication of impending trouble so
you can see here that
our indicator went red right on this bar
here and soon after this happened
price consolidated for a while and then
we started to get green printing back on
so the index started to look a little
bit more healthy on this bar right here
so that could be a key sign to start
paying attention for a potential
breakout of this consolidation
then we get more green here you could
start accumulating a position here
expecting
google which is a major player in the
nasdaq obviously you could use this
filter to inform your investment
decisions you could start accumulating
here so long as this stays green most of
the time and then eventually we start to
get the breakout so if you're aggressive
you could start buying in here as the
indicator starts turning green
and price is holding the lows
or you could simply wait for
the breakout which happens right here on
this gap up our filter regime filter is
nice and green meaning the nasdaq is
looking healthy overall google has
broken out of this consolidation can
start buying on this day here
in anticipation of a nice run
in price action and our regime stays
green all the way up until this bar
right here so notice that price action
is still trading above its
20 period moving average on this market
so google is looking good
but suddenly the nasdaq the overall
health of the market turns a little bit
sour this could be a great position to
trail your stop-loss up nice and tight
just in case the market does roll over
or you can start scaling out of your
position however you like to invest or
trade and then you can see that soon
after this turns red we enter a pullback
period
and then we get another green
regime change here on this gap up above
the moving average on this time frame
and then a couple of days later we get
signs of health coming back into the
market if you wanted to you could buy a
breakout of this high if the regime
filter stays green
which it does here we get the breakout
the close above this previous high
and then our filter is green and it
stays green for quite some time now of
course you are going to get the
occasional false signal there are ways
to improve this filter
for example just because one bar closes
below the moving average doesn't mean
that the market has turned sour i could
simply be testing the moving average so
one way you could improve this filter
and get rid of some of these false
signals is you could open up the source
code here we could say here is the
current market price trading above its
20 period moving average
or
was the market price
on the previous bar trading above its
key moving average now when i save my
code these false signals should go away
there we go we have a little bit of a
cleaner filter here so now the color
will only turn red if we've had more
than one bar so we've had two or more
bars
close below the moving average on our
regime filter market
and that is pretty much it for this
script and this lesson uh just before we
go i'll quickly show you how you could
apply this to crypto so let's jump over
to
one of my favorite projects kedano
open this up
and change our market
wrong indicator this one change our
market to
uh bitcoin index which is i believe blx
yeah bitcoin liquid index and let's
change the time frame to the 20 week
moving average that's a filter i like to
use in my own trading and click ok if i
zoom out a bit
you can see that during this entire
period bitcoin was trading above its 20
period weekly moving average and the
market was healthy pretty much through
this whole period it was a little bit
slow through here but this was just an
accumulation phase
and then eventually we turned red
right here
now it is obviously a little bit late
it's a little bit of a lagging signal
but the point of this is you'll never
know when the top is going to come in
the markets so maybe you scale out as
price starts to
get a bit exponential you sell some of
your position up here and then after the
crash
we go red
you don't buy any more of your favorite
cryptocurrency until
bitcoin starts trading above its 20-week
moving average again so you can see here
that
cardano got back above its own 20-day
period moving average but when we zoom
in here a bit
bitcoin didn't start looking healthy
until right here
and so if you didn't start buying kadano
until around here
sure you missed out on the bottom down
here but if you started buying
aggressively once bitcoin started to
look healthy you could have caught
this immense rally here from a dollar 30
up to around
three bucks just using a simple regime
filter and then there were signs of
trouble coming in around here when
bitcoin started to struggle to trade
above its 20-week period moving average
and of course you could play around with
this you could change this to the 20-day
period moving average and it might be a
little bit more responsive a little bit
more accurate and quick to pick up
changes in the market you could change
the period let's try a 10 period moving
average a 10 period moving average would
have gotten you in a lot lower in this
particular rally let's have a look at a
different market let's have a look at
ethereum
see how this would have affected
ethereum change this back to 20 and this
back to the 20 week and here you can see
a similar story all throughout 2020 uh
the regime was green and price just kept
rallying then when we had a bit of
trouble in here if you waited until the
filter changed you could have safely
bought aetherium right before this nice
rally
same with around here we started to have
some trouble
and then the regime filter turned green
and then we had a nice rally from there
now regime filters are a great way to
stay out of trouble when price is
struggling and you don't know what's
going to happen maybe it'll go lower
maybe it won't but you don't want to be
buying when there's a chance that the
whole market could tank any moment
whereas when our regime filter turns
green as kind of like a traffic light it
means the market overall is healthy and
it's a good time to be trading to the
long side and that is the purpose of a
regime filter and this is how you create
one i'll leave the source code below for
you to play around with and i'll speak
with you in the next lesson
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