V.13:07 (298-303): UDPrice Change Indicator by Dennis Meyers
This indicator expresses buy and sell signals based on user-defined percentage changes in a market. The UD% price change indicator is compared with a simple
moving average crossover and two different channel breakout systems using the Standard & Poor's 500 index as an example.
The percentage price change indicator, simple in concept and implementation, was one of the first indicators used to forecast the market. Its basis is simple enough. If the price moves up by a certain percent from the lowest low recorded while you are short, then you should initiate a long position and stay long until the price moves down a certain percent from the highest price recorded while you are long. At that point, you should go short.
Further, this curve-following indicator filters out all moves less than the certain percentage. The percent price change indicator is easier to implement and understand than many modern-day analysis methods, such as the fast Fourier transforms and autoregressive moving average (ARMA) parameter estimation techniques. The percent price change indicator has the advantage that it will perform even if cycles not sinusoidal in nature are present. A sinusoid wave will rise to a peak from a starting point in a certain amount of time and then fall back to that starting point in the same length of time. Sinusoids take the same time to rise as they do to fall. In reality, prices very rarely take the same length of time to go up as they do to go down. This can limit the usefulness of cycle analysis somewhat.
UD% PRICE CHANGE INDICATOR
The percent price change indicator must be brought up to date before it can compete with today's vast arsenal of technical indicators. This modernization can be accomplished by observing (somewhat simplistically) that price advances usually have different characteristics than price declines do. We can implement this observation by creating different percent price change filters for price up moves and down moves - and thus, the UD% price change indicator.
In the UD% price change indicator, if the price moves up by u% from the lowest low recorded while you were short, then you should initiate a long position and stay long until the price moves down d% from the highest price recorded while you were long and then go short. In the UD% price change indicator, u and d can be the same or they can be different. Basically, this indicator filters out all movements, random or not, less than u% while you are long and less than d % while you are short.