Constructing a damping-index trend filter

Contracting highs and lows as their own measure

This archive note reconstructs a damping-index so contracting highs and lows can be coded as a ratio, then used as a gate in front of a rule-based entry. The mechanical trading system stays flat until compression and trend alignment are both present, and it finishes with a four-bar-extreme-stop.

After a news shock that moves price without shifting supply and demand, the construction is motivated by a cobweb-adjustment. That zigzag is a supply-and-demand path in which price overshoots and then damps toward balance as producers and buyers respond with a lag. The cycle can be as short as a few minutes or as long as a multi-year production cycle.

Building the damping-index

The damping-index is a two-window ratio of average high-low span. It is built as the recent five-bar average high-minus-low span divided by the preceding five-bar span. Averaging lengths can be changed, but the published construction uses two consecutive five-bar windows.

The index is described as typically ranging from about 0.5 to 2 or 3. Any reading below 1 is treated as a strong detection of damping. The ratio flags contracting extremes when the recent window is narrower than the prior window.

Damping is distinguished from volatility because volatility can expand or contract without highs and lows drawing closer together. Quiet range and contracting extremes are therefore not coded as the same condition.

Entries that wait for compression and trend

A long signal requires a non-zero denominator, a damping-index below 1, a close above the average high of the prior two bars, and a trend-confirmation-window in which the average low of the last three bars is above the average high of a four-bar window starting ten bars earlier.

A short signal requires a damping-index below 1, a close below the average low of the prior two bars, and a trend-confirmation-window in which the average high of the last three bars is below the average low of a four-bar window starting ten bars earlier.

The trend-confirmation-window is that displaced comparison of recent average lows or highs against an earlier window. It requires the compression to occur inside an existing directional bias. Until the index and that displaced check are jointly true, the rule-based entry does not fire.

Closing the procedure at a four-bar extreme

Longs are protected and exited at the lowest low of the last four bars. Shorts are protected and exited at the highest high of the last four bars. That four-bar-extreme-stop is both the protective level and the exit, and it is the short lookback extreme that closes the procedure.

The same rules as a watchlist

Intraday examples present the same rules as a watchlist. An operator-veto still lets the operator skip a mechanically generated signal when the contracting pattern is poorly defined or the move has already extended.