Wednesday, April 29, 2015

Parabolic SAR Technical Indicator Tutorial and Examples

parabolic sarParabolic SAR technical indicator was developed by Welles Wilder and presented in June 1978 in his book "New Concepts in Technical Trading Systems".


The purpose of the parabolic system - to determine the tolerance within which price movement possible in order to stay in the current trend.


Initially the system was designed as a reverse, that is, at any time, it was assumed that the system is either in ascending or in a downtrend and must be opened in each case either long or short position. Current systems of evidence, in particular, and the original name of its main indicator - SAR (Stop and reverse price - price Stop and Reverse). However, in the future, due to the fact that the market is in a pronounced trend only short periods of time and the constant opening and changing positions is fraught with multiple losses, the system began to recommend to be used in conjunction with other indicators and methodologies.



General description


In the case of an uptrend, at any given time by the modified exponential determined indicative price - SAR, below which should not fall real price. Once the real price falls below the indicative, the system automatically assumes that the trend has changed in the descending and SAR indicates the maximum price above which should not raise the real price. Thus, a sufficient number of the analyzed period, the system automatically determines the direction of the trend and provides value for money, for a protective order.

 

Primary direction

The parabolic system automatically determines the direction of the market by any stretch than the first, therefore, a sufficient number of periods for analysis, given the primary direction of the market is irrelevant. To start can be determined arbitrarily. Necessary adjustments will occur automatically.

As the maximum and minimum prices for the primary direction is recommended, respectively, the maximum (max High) and minimal (minimum Low) these periods. The primary SAR - obtained for periods of at least in the case of the upward trend, and the maximum in the case of the downtrend.

The indicator is constructed on the price chart. On This indicator is similar to the moving average, with the only difference that Parabolic SAR moves with higher acceleration and may change its position relative to the price. On the "bull market" (Up Trend) indicator is below the prices on the "bearish trend" (Down Trend) - above.

Parabolic SAR is an outstanding indicator for providing exit points. Long positions should be closed when the price sinks below the indicator, and short - when the price rises above the Parabolic SAR. That is, you must keep track of the direction of the Parabolic SAR and hold open positions in the market only in the direction of the movement. Often, this indicator is used as a trailing stop line (trailing stop).

parabolic SAR

If the long position is open (ie price above the Parabolic SAR), the line will go up, no matter what direction the price. The amount of movement Parabolic SAR lines depends on the magnitude of the price movement.

For long positions:

SAR (i) = SAR (i - 1) + ACCELERATION * (HIGH (i - 1) - SAR (i - 1))

For short positions:

SAR (i) = SAR (i - 1) + ACCELERATION * (LOW (i - 1) - SAR (i - 1))

where:

SAR (i - 1) - the value of Parabolic SAR indicator on the previous bar;
ACCELERATION - acceleration factor;
HIGH (i - 1) - the highest price in the previous period;
LOW (i - 1) - the minimum price for the previous period.

The indicator value increases if the price of the current bar is higher than previous bullish and vice versa. This will double the acceleration factor (ACCELERATION), which would cause Parabolic SAR and the price. In other words, the indicator approaches the price, the faster, the faster the price rises or falls.

In simple words, buy when price closes above Parabolic SAR and sell when prices closes below Parabolic SAR.


Wednesday, January 14, 2015

Average Directional Movement Index (ADX) Technical Indicator Tutorial

ADXAverage Directional Movement Index, directional system (indicator developed by George. W. Wilder (JW Wilder) in addition to the Parabolic SAR system for measuring the intensity of the market trend; if the ADX is rising, it means that the market tendency becomes stronger, which is favorable condition for entering into transactions, and when ADX falls, it means that the trend in question, in this case the important signals given by the oscillators RSI and Momentum).


The author of this indicator is Welles Wilder, who described it in his book "New Concepts in Technical Trading Systems".


This method is based on a comparison of the 14 and 14 day -DI-period + DI, or subtracting the second from the first, or by applying indicators to each other. When the + DI above -DI, it is a clear signal to buy, if, on the contrary, lower - something for sale.


The simplest trading method based on the system of directional movement implies comparison of two direction indicators: the 14-period + DI and 14-period -DI. To do this, or charts of indicators one on the other, or + DI is subtracted from -DI. W. Wilder recommends buying when + DI is higher than -DI, and selling when + DI sinks lower than -DI.


These simple trading rules Wells Wilder added "extreme point rule." It is used to eliminate false signals and decrease the number of deals. The extreme point, when the + DI and -DI should be noted "extreme point." When the + DI rises above the -DI, the highest price of the day is the intersection. If + DI is lower than -DI, this point - the lowest price of the day crossing.


Extreme point is then used as the entry level market. Thus, after the signal to buy (+ DI rose above the -DI) one must wait till the price rises above the extreme point, and only then buy. If the price fails to rise above the extreme point, you should retain the short position.


To prevent false alarms, the system is supplemented "extreme point rule." During the + DI and -DI should note the "extreme point." If -DI below + DI, it will be an extreme point of intersection of the maximum price of the day, if the above - then the minimum. Without these points is difficult to determine the level of entry into the market.


ADX signals on the purchase and sale come from the intersection of the lines + DI and -DI:


+ DI line moves up: When the + DI crosses -DI from the bottom up, it indicates a reversal in the direction of the uptrend and signals the opening position for the purchase and immediate closing positions.


-DI Line moves up: When the line -DI crosses + DI from the bottom up, it indicates a reversal in the direction of the downward trend and signals the opening short positions and the immediate closing of positions on the purchase.


ADX




ADX indicator scale


If ADX is between 0 and 25 then the stock is in a trading range. It is likely just chopping around sideways. Avoid these weak, pathetic stocks!

Once ADX gets above 25 then you will begin to see the beginning of a trend. Big moves (up or down) tend to happen when ADX is right around this number.

When the ADX indicator gets above 30 then you are staring at a stock that is in a strong trend! These are the stocks that you want to be trading!

You won't see very many stocks with the ADX above 50. Once it gets that high, you start to see trends coming to an end and trading ranges developing again.



ADX indicator calculation


ADX = SUM ((+ DI - (-DI)) / (+ DI + (-DI)), N) / N


where:
N - number of periods used in calculation;
SUM (..., N) - the sum for N periods;
+ DI - the indicator value is positive price trends (positive directional index);
-DI - The indicator value is the negative direction of price movements (negative directional index).