Good morning,
Thanks Clint: it’s nice to know somebody remembers or ‘recognises’ my ‘Wilder work’!!! LOL!!!
The problem with Parabolic SAR is not so much how many times it’s signals are correct (because when they are correct the trades are normally highly profitable trades) but how many false signals it generates and unfortunately these false signals tend to negate the profits made on the highly profitable trades that I note.
Insofar as using ADX as a filter (as Wilder suggests) is concerned: I cannot say that this ever worked for me either. If you really think nicely about it: Parabolic SAR generates a signal when price has reacted enough to reverse (which means that the direction has changed obviously) and ADX is telling you how strong the trend (directional movement) is so what you inevitably end up with is a Parabolic SAR signal with an ADX reading informing you that there is NO directional movement or that directional movement is decreasing. It’s sort of ‘a contradiction in terms (indicators)’ in my opinion (NOT that I would ever question Wilder’s logic but I’ve just never found a signal where ADX is above 20 - 25 and rising, which would denote a strong trend or directional move, AND Parabolic SAR generating a signal at the same time but then again I cannot say that back then I had the patience to sit and wait for just such a setup so who knows i.e. it’s been YEARS since I used Parabolic SAR and, as Clint noted, there’s an entire thread of MANY pages on this very subject somwhere around here. It’s entitled ‘Parabolic SAR - that’s all!!!’ but don’t be fooled i.e. that thread was started by me when I ‘thought I knew it all’ and that trading was really simple and that everybody ELSE didn’t know what THEY were doing. Needless to say: many tens, actually more like hundreds, of thousands of dollars of losses later, not all due to using Parabolic SAR I must note, I was the one that was wrong)!!! LOL!!!
BUT: it’s not ALL ‘doom and gloom’. I did indeed find a ‘fix’ or filter for Parabolic SAR which IRONICALLY is based on some of Wilder’s other work AS WELL as the fact that if you read Wilder’s book ‘New Concepts In Technical Trading Systems’ (my ‘trading bible’ as it were) there is a very subtle but significant note made by Wilder in the chapter on Parabolic SAR that makes the difference between ‘life and death’ with this indicator. I don’t know why he didn’t expand on this point in more detail.
The ‘fix’ or filter:
You wait for Parabolic SAR to generate a signal BUT YOU DO NOT ENTER AT THAT TIME. You WAIT until you get a retracement in price which, in turn, will then have formed what Wilder refers to as a ‘HIP’ (‘High Point’) which is a bar formation where you have a high with two lower highs on either side of it. That’s the HIP (I refer to this formation as a ‘three bar fractal’ but that’s not important). You then place an entry stop order ‘a couple of ticks (pips)’ (I use five ticks as ‘standard’ on equities, futures, and commodities and IF BY CHANCE I take a FOREX trade I tend to use 10% of Wilder’s ATR(14) as an offset for stop orders) above the HIP (bar). If your entry stop order is executed you then use Parabolic SAR to trail your stop until stopped out. Sometimes you may have another even lower HIP formed before your (initial) entry stop order has been executed in which case you move your entry stop order to this point. This results in you getting ‘in’ at an even better price as WELL as being able to open a larger position (because remember that Parabolic SAR is constantly moving your stop closer and closer).
It would ‘help’ if ADX was above 20 - 25 and rising and this IS possible i.e. by waiting for the retracement price has already started to move directionally again in spite of the fact that ADX may or may not have been above 20 - 25 and rising when the first Parabolic SAR ‘dot’ (signal) had been generated (but of course this will require loads of patience to sit and wait for just such a setup).
Note: in the above example I’m using a long trade as an example. For a short trade you wait for a ‘LOP’ (‘Low Point’) to form and place your entry stop order below the LOP and so on and so forth.
Using the method described above accomplishes the following: it eliminates ALMOST all false Parabolic SAR signals. The drawback of the method described above is that sometimes you’ll miss some extremely good trades (those where the price just keeps moving without even ‘looking back’ and therefore no HIPs or LOPs are formed so you don’t get an entry point) but this does not happen very often I assure you AND you may sometimes get into a trade ‘late’ which is unfortunate. But as many ‘famous’ (‘infamous’???) trading professionals note: ‘it’s not how much you make in this business it’s now much you don’t lose’!!!
The point that Wilder didn’t expand on is really subtle in the given Parabolic SAR examples in his book ‘New Concepts In Technical Trading Systems’ (in which Parabolic SAR, in addition to many other wonderful and ingenious trading systems and indicators, developed by Wilder, were first published). In the Parabolic SAR examples he enters the trade on a ‘breakout’ above the lowest HIP made in the previous short trade (again: I’m using a long trade for explanation purposes here) AND NOT THE MOMENT when the first Parabolic SAR ‘dot’ appears (although the text that follows would indeed suggest that once IN a trade that is what the trader would do and this is confusing to say the least and the reason that this indicator fails for most traders in my opinion).
I guess another (shorter) way of explaining the above method: you are actually using Parabolic SAR to indicate the direction of the trend but only entering after a pullback in price (which does happen more often than not).
Let me also note this: (in my opinion) you’re wasting your time trading on any timeframe shorter than the daily timeframe (not any single one of Wilder’s technical trading systems or indicators were meant for use on any timeframe other than the daily timeframe). Of course: this means you need more capital in order to be able to manage your risk 2% of your account and PREFERABLY 0.2% of you account). Also: Wilder developed many other and far better technical trading systems and indicators than Parabolic SAR. That said: it’s probably the easiest of all of them for a new trader to trade.
One last thing: when placing long stop order please do remember to compensate for (add) to the spread of the instrument being traded (if working from a ‘bid price only’ chart). Trust me on this one.
For what it’s worth: I noticed a while back that some ‘monkey’ has gone to the trouble of scanning Wilder’s book ‘New Concepts In Technical Trading Systems’ and posted it on the Internet so it is available for download without buying it (I used to insist upon this but apparantely the copyright has run out so it’s no longer subject to copyright but I’ve always felt that the $60 or so that it costs is a fair price for something that could very well pay for itself in one single trade)!!! Be very careful with some of these links ‘floating around’ that detail Wilder’s ‘stuff’ i.e. for the most part they’re BARELY accurate ‘summaries’ of ‘the old man’s’ work first and foremost. Also: be especially careful of the Wilder indicators supplied as ‘standard’ with your trading platform i.e. there are VERY few trading platofrms that I’ve looked at where the calculations for his indicators are correct (ADX and ATR in MT4 are FINE examples i.e. they’re BOTH wrong in that they do not incorporate Wilder’s ‘smoothing technique’ and this results in many more ‘whipsaws’ than would normally be the case. SOMEHOW they managed to get RSI right though). LOL!!! Anyway: the books details CORRECTLY everything and anything that you would ever need or want to know about Parabolic SAR, ADX, ATR, and RSI (to name but a few).
Regards,
Dale.
