Parabolic SAR
Parabolic SAR for Ebay during 2002.
In the field of technical analysis,
Parabolic SAR (SAR - stop and
reverse) is a method devised by J. Welles Wilder, Jr., to find trends in market prices or securities. It may be used as a trailing stop loss based on prices tending to stay within a parabolic curve during a strong trend. The concept draws on the idea that time is the enemy (similar to option theory's concept of time decay), and unless a security can continue to generate more profits over time, it should be liquidated. The indicator generally works well in trending
markets, but provides "whipsaws" during non-trending, sideways phases; as such, Wilder recommended establishing the strength and direction of the trend first through the use of things such as the Average Directional Index, and then using the Parabolic SAR to trade that trend.
A parabola below the price is generally bullish, while a parabola above is generally bearish.
Construction
The Parabolic SAR is calculated almost independently for each trend in the price. When the price is in an uptrend, the SAR appears below the price and converges upwards towards it. Similarly, on a downtrend, the SAR appears above the price and converges downwards.
At each step within a trend, the SAR is calculated ahead of time. That is, tomorrow's SAR value is built using data available today. The general formula used for this is:
Where and represent today's and tomorrow's SAR values, respectively.
The extreme point, , is a record kept during each trend that represents the highest value reached by the price during the current uptrend — or lowest value during a downtrend. On each period, if a new maximum (or minimum) is observed, the EP is updated with that value.
The value represents the acceleration factor. Usually, this is set to a value of 0.02 initially. This factor is increased by 0.02 each time a new EP is recorded. In other words, each time a new EP is observed, it will increase the acceleration factor. This will then quicken the rate at which the SAR converges towards the price. To keep it from getting too large, a maximum value for the acceleration factor is normally set at 0.20, so that it never goes beyond that. For stocks trading, it is preferable to set the acceleration factor to 0.01, in order to be less sensitive to local decreases. For commodity or currency trading, it is preferable to use a value of 0.02.
The SAR is iteratively calculated for each new period using this recursive definition. There are, however, two special cases that will modify the SAR value:
• If tomorrow's SAR value lies within (or beyond) today's or yesterday's price range, the SAR must be set to the closest price bound. For example, if in an uptrend, the new SAR value is calculated and it results to be greater than today's or yesterday's lowest price, the SAR must be set equal to that lower boundary.
Parabolic SAR 116 • If tomorrow's SAR value lies within (or beyond) tomorrow's price range, a new trend direction is then signaled,
and the SAR must "switch sides."
Upon a trend switch, several things happen. The first SAR value for this new trend is set to the last EP recorded on the previous trend. The EP is then reset accordingly to this period's maximum. The acceleration factor is reset to its initial value of 0.02.
External links
• Using Parabolic SAR for Buy and Sell signals, and placing Stop Loss orders [1]
• How to Trade Parabolic SAR - InformedTrades [2]
• Yahoo! Finance Charts User Guide [3]
References
• J. Welles Wilder, Jr. (June 1978). New Concepts in Technical Trading Systems. Greensboro, NC: Trend Research. ISBN 978-0894590276.
References
[1] http://www.onlinetradingconcepts.com/TechnicalAnalysis/ParabolicSAR.html [2] http://www.informedtrades.com/4559-how-trade-parabolic-sar-forex-futures-stocks.html [3] http://biz.yahoo.com/charts/guide16.html
Trix (technical analysis)
Trix (or TRIX) is a technical analysis oscillator developed in the 1980s by Jack Hutson, editor of Technical
Analysis of Stocks and Commodities magazine. It shows the slope (i.e. derivative) of a triple-smoothed exponential moving average. The name Trix is from "triple exponential."
Trix is calculated with a given N-day period as follows:
• Smooth prices (often closing prices) using an N-day exponential moving average (EMA). • Smooth that series using another N-day EMA.
• Smooth a third time, using a further N-day EMA.
• Calculate the percentage difference between today's and yesterday's value in that final smoothed series.
Like any moving average, the triple EMA is just a smoothing of price data and therefore is trend-following. A rising or falling line is an uptrend or downtrend and Trix shows the slope of that line, so it's positive for a steady uptrend, negative for a downtrend, and a crossing through zero is a trend-change, i.e. a peak or trough in the underlying average.
The triple-smoothed EMA is very different from a plain EMA. In a plain EMA the latest few days dominate and the EMA follows recent prices quite closely; however, applying it three times results in weightings spread much more broadly, and the weights for the latest few days are in fact smaller than those of days further past. The following graph shows the weightings for an N=10 triple EMA (most recent days at the left):
Trix (technical analysis) 117
Triple exponential moving average weightings, N=10 (percentage versus days ago)
Note that the distribution's mode will lie with pN-2's weight, i.e. in the graph above p8 carries the highest weighting. An N of 1 is invalid.
The easiest way to calculate the triple EMA based on successive values is just to apply the EMA three times, creating single-, then double-, then triple-smoothed series. The triple EMA can also be expressed directly in terms of the prices as below, with today's close, yesterday's, etc., and with (as for a plain EMA):
The coefficients are the triangle numbers, n(n+1)/2. In theory, the sum is infinite, using all past data, but as f is less than 1 the powers become smaller as the series progresses, and they decrease faster than the coefficients increase, so beyond a certain point the terms are negligible.
References
• StockCharts.com article on TRIX [1], by Nicholas Fisher