Good Morning!!!
It’s Saturday morning here and I am preparing my Parabolic SAR Daily Worksheet for next week and I am ‘nurturing’ some new ‘ideas’ which relate to ‘false’ Parabolic SAR signals.
Now don’t get worried - this is still ‘pure’ Parabolic SAR - the idea is to help you to stop taking (or at least reduce the likelihood of you taking) entries based on ‘false’ Parabolic SAR signals i.e. there are two main ‘problems’ with Parabolic SAR - one is the ‘Parabolic whoops’ (‘false’ entry signals which invariably result in you being stopped out and taking a small loss because the direction was wrong) and the other is getting out early and thus saving some profits at the end i.e. just before the inevitable reversal comes (which we have already covered and I still maintain that Ingot54’s idea of using the next available shorter timeframe to ‘lock in’ your profits - once you are in profit on the longer or ‘primary’ timeframe - is first class).
Now for my thoughts.
First of all - J. Welles Wilder Jnr. - does say that Parabolic SAR should only be used in a trending market and not in a range bound market. We know this.
In his book ‘New Concepts In Technical Trading Systems’ he details two actual trading systems to be used in range bound markets: the ‘Trend Balance Point System’ and the ‘Reaction Trend System’ (neither of which I can detail here for reasons mentioned earlier in this thread).
However, also included in the book, is the ‘Directional Movement System’ which is based on the (his) ‘Directional Movement Index’ (DX), ‘Average Directional Movement Index’ (ADX), and ‘Average Directional Movement Rating’ (ADXR). ADX is (almost) always included with charting tools or in trading platforms that are ‘worth their salt’. Unfortuanately - what I have not seen on any other charting tool or trading platform - other than (of course) Delta’s - is ADXR (but it can be manually calculated - see below).
ADXR is the ‘rating’ of directional movement i.e. the higher the ‘rating’ the greater the directional movement.
Basically the (his) ‘Directional Movement System’ should not be used on any commodity (forex pair - I added this) that has an ADXR of less than 20 - 25 (he says this).
Now - I’m interpreting things as follows:
The (his) ‘Directional Movement System’ should not be used on any commodity (forex pair - again - I added this) that has an ADXR of less than 20 - 25. Now if there is no (or low) directional movement i.e. ADXR is less than 20 - 25 then you are in a range bound market and if you are in a range bound market you are not in a trending market and we know that Parabolic SAR is only supposed to be used in a trending market.
(Sorry - I know I may be ‘waffling’ here - but I’m also trying to sort my ‘thoughts’ out in some kind of ‘logical’ fashion).
So - what I am thinking / saying is this:
First:
Even if there is a new Parabolic SAR dot appearing i.e. telling you to open a new position or stop and reverse BUT ADXR is less than 25 - then - you don’t take the trade. If ADXR is equal to or greater than 25 - then you take the trade.
Now - if ADXR is less than 25 - we are saying that the pair (whichever pair we are dealing with above) is range bound and not trending we therefore should be using another ‘system’ or indicator to trade the pair UNTIL it ‘breaks out’ of the range and starts trending i.e. when the pair finally ‘breaks out’ of the range ADXR should increase after the ‘breakout’ and will now be equal to or greater than 25 and then we know that we are in a trending market or rather that the pair is now trending (finally).
Now (from his book) you would be using either of the trading systems mentioned at the beginning of this message (and note that they are actual ‘trading systems’ and are based on price movement AND are not based on indicators) - in a range bound market (I admit that I DO use these trading systems on the Indices when they are range bound but lately that has not been happening so it’s not been necessary to use these trading systems BUT they do work - well - and they certainly give you a way to ‘fight’ the boredom and make small profits when things are ‘ranging’).
Why am I telling you this?
Well because one of these trading systems incorporates and uses (amongst other things) ‘breakout’ points and although ‘breakout’ points are used in these trading systems the calculation of ‘breakout’ points is NOT subject to copyright so I don’t see any problem here i.e. ANYONE can find the formula for calculating ‘breakout’ points on the Internet.
Now - the calculation of ‘breakout’ points is as follows:
A ‘High Breakout Point’ (HBOP) is calculated as follows:
HBOP = ( 2 * ( High + Low + Close) / 3 ) ) - ( 2 * Low) + High
and a ‘Low Breakout Point’ (LBOP) is calculated as follows:
LBOP = ( 2 * ( High + Low + Close) / 3 ) ) - ( 2 * High) + Low
OK so far?
Now - putting all of this together:
You only take an entry based on Parabolic SAR when ADXR is equal to or greater than 25. In other words: if Parabolic SAR is giving us an entry signal to go long - we go long IF ADXR is equal to or greater than 25 and if Parabolic SAR is giving us an entry signal to go short - we go short IF ADXR is equal to or greater than 25.
If ADXR is less than 25 then we are assuming that the pair is range bound so we do NOT take an entry based on Parabolic SAR if there is one.
If ADXR is less than 25 BUT we have a Parabolic SAR entry signal we calculate and wait for either the HBOP or LBOP to be hit before we enter IN THE DIRECTION AS INDICATED BY PARABOLIC SAR.
In other words: first - we calculate the HBOP and LBOP. If we are getting a Parabolic SAR entry signal to go long BUT ADXR is less than 25 we only enter (long) when HBOP has been hit and we enter immediately AT THE PRICE OF HBOP. If we are getting a Parabolic SAR entry signal to go short BUT ADXR is less than 25 we only enter (short) when LBOP has been hit and we enter immediately AT THE PRICE OF LBOP.
Once you have opened your positions using the above ‘method’ then you just track them using Parabolic SAR as normal and use Ingot54’s exit and re-entry method or idea and you should be ‘a winner’!!!
The calculation for ADXR (by the way) is:
ADXR = ( ADX Today + ADX 14 days ago ) / 2
Like I said before: ADX is a ‘standard’ indicator on most trading platforms or charting tools so all you have to do is put ADX on your chart, get todays value, and the value 14 days ago, and divide by two.
OK - after all of that - what do you people think?
Although my ‘shotgun’ approach seems to be working (well) i.e. open positions on each and every single pair available to you when Parabolic SAR gives you an entry signal I am now interested in reducing the ‘weight’ that the losing trades carry against the profitable trades. The main idea of the above is basically to keep you (initally) out of trades where the pair is range bound BUT to get you into trades when the pair breaks out of the range and starts trending.
Now there is something for you to ‘get your teeth into’ this weekend.
What do you think? Thoughts? Ideas? Tell me I’m talking ‘f***g st’? What?
Regards,
P.S. What I have attempted to do is utilize parts of Mr Wilder’s work that are NOT subject to copyright i.e. ‘public domain’ and incorporate them into our ‘Parabolic SAR - that’s all!’ thread or ‘system’ AKA ‘The Parabolic SAR Shotgun System’!!! If I HAVE infringed the copyright (which I’m ALMOST sure I have not) then I do apologize - BUT - I did try to avert this situation and have not heard anything more about it (you KNOW who I’m talking to - and it’s not anyone from babypips.com - and I’m still awaiting your response)!!!