Time-Decaying Percentile Oscillator [BackQuant]

Time-Decaying Percentile Oscillator

1. Big-picture idea
Traditional percentile or stochastic oscillators treat every bar in the look-back window as equally important. That is fine when markets are slow, but if volatility regime changes quickly yesterday’s print should matter more than last month’s. The Time-Decaying Percentile Oscillator attempts to fix that blind spot by assigning an adjustable weight to every past price before it is ranked. The result is a percentile score that “breathes” with market tempo much faster to flag new extremes yet still smooth enough to ignore random noise.

2. What the script actually does

Build a weight curve
• You pick a look-back length (default 28 bars).
• You decide whether weights fall Linearly, Exponentially, by Power-law or Logarithmically.
• A decay factor (lower = faster fade) shapes how quickly the oldest price loses influence.
• The array is normalised so all weights still sum to 1.

Rank prices by weighted mass
• Every close in the window is paired with its weight.
• The pairs are sorted from low to high.
• The cumulative weight is walked until it equals your chosen percentile level (default 50 = median).
• That price becomes the Time-Decayed Percentile.

Find dispersion with robust statistics
• Instead of a fragile standard deviation the script measures weighted Median-Absolute-Deviation about the new percentile.
• You multiply that deviation by the Deviation Multiplier slider (default 1.0) to get a non-parametric volatility band.

Build an adaptive channel
• Upper band = percentile + (multiplier × deviation)
• Lower band = percentile – (multiplier × deviation)

Normalise into a 0-100 oscillator
• The current close is mapped inside that band:
0 = lower band, 50 = centre, 100 = upper band.
• If the channel squeezes, tiny moves still travel the full scale; if volatility explodes, it automatically widens.

Optional smoothing
• A second-stage moving average (EMA, SMA, DEMA, TEMA, etc.) tames the jitter.
• Length 22 EMA by default—change it to tune reaction speed.

Threshold logic
• Upper Threshold 70 and Lower Threshold 30 separate standard overbought/oversold states.
• Extreme bands 85 and 15 paint background heat when aggressive fade or breakout trades might trigger.

Divergence engine
• Looks back twenty bars.
• Flags Bullish divergence when price makes a lower low but oscillator refuses to confirm (value < 40).
• Flags Bearish divergence when price prints a higher high but oscillator stalls (value > 60).

3. Component walk-through

• Source – Any price series. Close by default, switch to typical price or custom OHLC4 for futures spreads.
• Look-back Period – How many bars to rank. Short = faster, long = slower.
• Base Percentile Level – 50 shows relative position around the median; set to 25 / 75 for quartile tracking or 90 / 10 for extreme tails.
• Deviation Multiplier – Higher values widen the dynamic channel, lowering whipsaw but delaying signals.
• Decay Settings
– Type decides the curve shape. Exponential (default 1.16) mimics EMA logic.
– Factor < 1 shrinks influence faster; > 1 spreads influence flatter.
– Toggle Enable Time Decay off to compare with classic equal-weight stochastic.
• Smoothing Block – Choose one of seven MA flavours plus length.
• Thresholds – Overbought / Oversold / Extreme levels. Push them out when working on very mean-reverting assets like FX; pull them in for trend monsters like crypto.
• Display toggles – Show or hide threshold lines, extreme filler zones, bar colouring, divergence labels.
• Colours – Bullish green, bearish red, neutral grey. Every gradient step is automatically blended to generate a heat map across the 0-100 range.

4. How to read the chart

• Oscillator creeping above 70 = market auctioning near the top of its adaptive range.
• Fast poke above 85 with no follow-through = exhaustion fade candidate.
• Slow grind that lives above 70 for many bars = valid bullish trend, not a fade.
• Cross back through 50 shows balance has shifted; treat it like a micro trend change.
• Divergence arrows add extra confidence when you already see two-bar reversal candles at range extremes.
• Background shading (semi-transparent red / green) warns of extreme states and throttles your position size.

5. Practical trading playbook
Mean-reversion scalps
 1. Wait for oscillator to reach your desired OB/ OS levels
 2. Check the slope of the smoothing MA—if it is flattening the squeeze is mature.
 3. Look for a one- or two-bar reversal pattern.
 4. Enter against the move; first target = midline 50, second target = opposite threshold.
 5. Stop loss just beyond the extreme band.

Trend continuation pullbacks
 1. Identify a clean directional trend on the price chart.
 2. During the trend, TDP will oscillate between midline and extreme of that side.
 3. Buy dips when oscillator hits OS levels, and the same for OB levels & shorting
 4. Exit when oscillator re-tags the same-side extreme or prints divergence.

Volatility regime filter
 • Use the Enable Time Decay switch as a regime test.
 • If equal-weight oscillator and decayed oscillator diverge widely, market is entering a new volatility regime—tighten stops and trade smaller.

Divergence confirmation for other indicators
 • Pair TDP divergence arrows with MACD histogram or RSI to filter false positives.
 • The weighted nature means TDP often spots divergence a bar or two earlier than standard RSI.

Swing breakout strategy
 1. During consolidation, band width compresses and oscillator oscillates around 50.
 2. Watch for sudden expansion where oscillator blasts through extreme bands and stays pinned.
 3. Enter with momentum in breakout direction; trail stop behind upper or lower band as it re-expands.

6. Customising decay mathematics

Linear – Each older bar loses the same fixed amount of influence. Intuitive and stable; good for slow swing charts.

Exponential – Influence halves every “decay factor” steps. Mirrors EMA thinking and is fastest to react.

Power-law – Mid-history bars keep more authority than exponential but oldest data still fades. Handy for commodities where seasonality matters.

Logarithmic – The gentlest curve; weight drops sharply at first then levels off. Mimics how traders remember dramatic moves for weeks but forget ordinary noise quickly.

Turn decay off to verify the tool’s added value; most users never switch back.

7. Alert catalogue

• TD Overbought / TD Oversold – Cross of regular thresholds.
• TD Extreme OB / OS – Breach of danger zones.
• TD Bullish / Bearish Divergence – High-probability reversal watch.
• TD Midline Cross – Momentum shift that often precedes a window where trend-following systems perform.

8. Visual hygiene tips

• If you already plot price on a dark background pick Bullish Color and Bearish Color default; change to pastel tones for light themes.
• Hide threshold lines after you memorise the zones to declutter scalping layouts.
• Overlay mode set to false so the oscillator lives in its own panel; keep height about 30 % of screen for best resolution.

9. Final notes
Time-Decaying Percentile Oscillator marries robust statistical ranking, adaptive dispersion and decay-aware weighting into a simple oscillator. It respects both recent order-flow shocks and historical context, offers granular control over responsiveness and ships with divergence and alert plumbing out of the box. Bolt it onto your price action framework, trend-following system or volatility mean-reversion playbook and see how much sooner it recognises genuine extremes compared to legacy oscillators.

Backtest thoroughly, experiment with decay curves on each asset class and remember: in trading, timing beats timidity but patience beats impulse. May this tool help you find that edge.