TASC 2024.03 Rate of Directional Change

14 Feb

█ OVERVIEW

This script implements the Rate of Directional Change (RODC) indicator introduced by Richard Poster in the "Taming The Effects Of Whipsaw" article featured in the March 2024 edition of TASC's Traders' Tips.


█ CONCEPTS

In his article, Richard Poster discusses an approach to potentially reduce false trend-following strategy entry signals due to whipsaws in forex data. The RODC indicator is central to this approach. The idea behind RODC is that one can characterize market whipsaw as alternating up and down ZigZag segments. By counting the number of up and down segments within a lookback window, the RODC indicator aims to identify if the window contains a significant whipsaw pattern:

RODC = 100 * Segments / Window Size (bars)

Larger RODC values suggest elevated whipsaw in the calculation window, while smaller values signify trending price activity.


█ CALCULATIONS

• For each price bar, the script iterates through the lookback window to identify up and down segments.
• If the price change between subsequent bars within the window is in the direction opposite to the current segment and exceeds the specified threshold, the calculation interprets the condition as a reversal point and the start of a new segment.
• The script uses the number of segments within the window to calculate RODC according to the above formula.
• Finally, the script applies a simple moving average to smoothen the RODC data.

Users can change the length of the lookback window, the threshold value, and the smoothing length in the "Inputs" tab of the script's settings.