BAYESIAN SENTIMENT MOMENTUM OSCILLATOR Trading Guide

The Bayesian Sentiment Momentum Oscillator (BSMO) is a state-of-the-art probabilistic oscillator that evaluates multiple price-action and volume characteristics on each bar to update a Bayesian probability score representing buyer control (from 0% to 100%). By applying Bayesian probability rules to traditional market metrics, it avoids lag while staying robust against market noise.

How it works

The oscillator computes four distinct Bayesian likelihood estimations:

• Candle Body Ratio: Measures the relative size and direction of the candle body compared to its full range.
• Wick Pressure: Evaluates the size of the lower wick (buying pressure) versus the upper wick (selling pressure).
• Volume-Weighted Acceleration: Determines if volume confirms the bar direction by analyzing the volume ratio against its moving average.
• Price Momentum Alignment: Calculates normalized price changes compared to the Average True Range (ATR) to measure momentum strength.

Using a prior probability of 50/50, these inputs are combined into a joint posterior probability of bullish sentiment, which is smoothed using an Exponential Moving Average (EMA) to yield the final BSMO line.

What does the indicator show?

• BSMO Line: Shows the smoothed probability of buyers controlling the market. Values above 50% indicate bullish dominance, and values below 50% indicate bearish dominance.
• Sentiment Zones:
  • Bullish Sentiment Zone (Above 70%): Shaded in green. Indicates high-probability bullish momentum.
  • Bearish Sentiment Zone (Below 30%): Shaded in red. Indicates high-probability bearish momentum.
  • Neutral Zone (30% to 70%): Shaded in grey. Indicates consolidation, choppy markets, or lack of clear trend direction.

Trading Strategies

• Sentiment Breakouts: Go long when the BSMO line crosses above the 70% threshold (entering the bullish zone), and go short when it crosses below 30% (entering the bearish zone).
• Momentum Mean Reversion: In ranging markets, look for extreme peaks above 90% or drops below 10% to identify exhaustion points where price is likely to revert.