Good (Saturday) evening all!!!
The 'Quote Price Factor' or 'QPF'!!!
The QPF is determined as follows using the spread:
GBP/ZAR: spread is 0.0500 so the QPF is 0.0100
EUR/USD: spread is 0.0003 so the QPF is 0.0001
AUD/NZD: spread is 0.0010 so the QPF is 0.0010
In other words: the QPF is always 1 (one) and is placed (for want of a better explanation) in line with the 'first significant digit' of the spread.
Now you may ask WHY this is necessary.
Well the answer is simple: if you do NOT use the QPF with forex pairs the SIS Trailing Index SAR will be SO far 'behind' that it will NEVER be meaningful i.e. if you do NOT use the QPF then you may as well just exclude the Trailing Index SAR altogether and just trade the HSP's and LSP's.
And why do we use the spread to determine the QPF? Again simple. The spread is indicative of the expected volatility of the forex pair. So: if you decided that you were not going to base the QPF on the spread but rather just on the number of decimals in the quoted price then this would OBVIOUSLY work for EUR/USD i.e. it would be 0.0001 (as above) BUT if you used the SAME 'logic' for something like GBP/ZAR (also quoted with four decimal places) then even the very slightest of moves would give you a SIS Trailing Index SAR signal and this would result in just about every signal being 'false' on GBP/ZAR.
So: you calculate your SI EXACTLY as it is in 'the book' BUT you then DIVIDE the SI by the QPF and use the resulting ASI. Simple as that!!!
HOWEVER: as I was typing this post I've just realised that MAYBE I've been wrong all along here!!! Maybe even WITH the QPF based on the spread the Trailing Index SAR's are STILL too 'close'. It just 'dawned' on me now: maybe the BETTER WAY is to NOT use a QPF but rather 'agree' the format of the quoted price to that of a commodity (which as we know is what these systems are based on anyway)!!!
In other words (forgetting about the QPF above):
The ASI calculation for GBP/JPY would be IDENTICAL to 'the book' because GBP/JPY is quoted in the format '999.99' (same as a commodity e.g. Soybeans is quoted in the format '9999.99'). In other words: BOTH have the same number of decimal places.
BUT NOW (maybe THIS is what we should be doing):
In order to calculate the ASI for EUR/USD you would multiply the SI by 100 (in effect what you're doing is 'agreeing' the format of the quoted price to that of a commodity as in the example above) and then calculate the ASI based on the resulting SI.
Now I've had a look at the result of this change. It DEFINTELY does move the Trailing Index SAR much further away from the current ASI value/ What this of course means is that if a trade goes against you it has to go a whole lot further against you before you get the signal to stop and reverse as per the Trailing Index SAR. HOWEVER: MAYBE, JUST MAYBE, this is INDEED the way it's supposed to be i.e. by making this change you're certainly going to get a whole lot less false SAR signals!!!
So let me put it this way:
Take a look and see what you think. Yes: the QPF solution is working for me no doubt BUT maybe it's also the reason why I get many more Trailing Index SAR signals to reverse than I'd like!!!
Hmmm.
Never a dull moment!!!
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