R-Squared Trend Strength and Direction [CHE]

Introduction

TradingView is a web-based platform that allows traders and investors to conduct comprehensive technical analyses, develop trading strategies, and track market movements in real-time. One of the many features TradingView offers is the ability to create custom indicators using Pine Script. In this presentation, we will focus on the implementation and application of an R-Squared indicator for analyzing trend strength and direction, as well as using the T3 indicator for trend direction confirmation.

---

What is R-Squared?

R-Squared (R²), also known as the coefficient of determination, is a statistical measure that represents the proportion of the variance for a dependent variable that's explained by an independent variable(s). In technical analysis, R-Squared is used to quantify the clarity of a trend. A higher R-Squared indicates a clearer trend, less affected by random price fluctuations.

---

Pine Script: Implementing the R-Squared Indicator

Inputs:
- Source: The data source to be analyzed, such as the average of high and low prices.
- Period: The period length for calculating sums and R-Squared values.

Sum Calculations:
- Sum X and Sum XX: These sums relate to the indices of the selected period.
- Sum XY and Sum YY: These sums relate to the products of the indices and their respective price values.
- Sum Y: The sum of price values over the chosen period.

Q-Values Calculation:
- Q-values are used to calculate the R-Squared value, which indicates trend clarity.

Trend State:
- Based on the R-Squared value, a trend state is determined, indicating whether a clear trend is present. Specific threshold values are used to identify trend changes.

---

Using the T3 Indicator

The T3 indicator is used exclusively for confirming the trend direction in this strategy. It helps verify the direction of the trend identified by the R-Squared indicator.

T3 Indicator Calculation:
- The T3 indicator uses a series of exponential smoothings to smooth price movements and provide a clearer view of the trend direction.
- The T3 indicator confirms the trend direction indicated by the R-Squared indicator.

---

Functioning of the R-Squared and T3 Combination

1. Input Parameters:
- Define the data source and period length for calculating sums and R-Squared values.

2. Sum Calculations:
- Calculate various sums over the defined period needed to derive Q-values.

3. Q-Values Calculation:
- Derive Q1, Q2, and Q3 from the sums to calculate the R-Squared value.

4. Trend State:
- Use the R-Squared value to determine if a clear trend is present, utilizing threshold values to recognize trend changes.

5. Trend Direction Confirmation with T3:
- Calculate the T3 indicator to confirm the trend direction. The T3 is used solely for direction confirmation, not for clarity.

6. Long and Short Conditions:
- Define long and short entry conditions based on the combination of R-Squared and T3 indicators, and visualize them on the chart.

---

Conclusion

The R-Squared indicator is a powerful tool for analyzing the clarity of a trend. By integrating it into TradingView using Pine Script, traders can make informed decisions and optimize their trading strategies. The T3 indicator is used exclusively in this strategy to confirm the trend direction, enhancing the accuracy of trading signals.

---

Questions and Discussion

Are there any questions about the implementation or application of the R-Squared indicator in TradingView? How can we further improve this indicator or integrate it into existing strategies?

Best regards
Chervolino