Parabolic

• Parabolic (Para)

• Welles Wilder's Parabolic study is a time/price reversal system. The letters "SAR" stand for "stop and reverse" meaning that the position is reversed when the protective stop is hit. It is a trend-following system. As prices trend higher, the SARs tend to start out slower and then accelerate with the trend. In a downtrend, the same thing happens but in the opposite direction. The SAR numbers are calculated and available to the user for the following day based on the following equation:

• SAR (tomorrow)= SAR (today) + AF(EP trade – SAR today)

• where: AF begins at 0.020 (default value) and is increased by .02 each bar that a new high/low is made (depending on the trend direction) until a value of 0.20 is reached; EP = Extreme Price point for the trade made so far (if Long, EP is the extreme high price for the trade; if Short, EP is the extreme low price for the trade).

• Thus, the Parabolic Time/Price System rides the trend until the SAR price is penetrated. Then the existing position is closed out and the reverse position is opened.

Moving Averages

• Trend following indicator

• Moving average is a smoothing indicator

• Moving averages are lagging indicators which do not work

well in non-trending markets. Results in trading whipsaws

Types of Moving Averages

• Simple Moving Average – Most commonly used – arithmetic mean

– Gives equal weight to each price

• Weighted Moving Average – Puts greater weight on the most recent activity. For example in a 5 bar

weighted moving average the last bar is multiplied by 5, the next to the last bar is multiplied by 4 and so on. The total value is divided by the sum of the multipliers, i.e. the divisor to the 5 bar WMA is 15 ( 5+4+3+2+1=15)

• Exponential Moving Average – Also puts greater weight on the most recent activity.

– Percentage weight is used t give greatest weight to most recent activity.

• Smoothed Moving Average – Similar to the simple moving average except the previous smooth average

value is subtracted rather than the oldest value in a simple moving average.

Simple Moving Average

• For the following example the PERIOD = 3.

• The first value for a Simple Average is determined by formula SIMPLE. It is plotted on the chart at the third bar from the left side of the screen.

• SIMPLE = (PRICE 1 + PRICE 2 + PRICE 3) / PERIOD

• The next value would be plotted at the fourth bar from the left side of the screen.

• SIMPLE = (PRICE 2 + PRICE 3 + PRICE 4)/PERIOD

• Subsequent values would be determined by eliminating the oldest PRICE from the calculation, and including the next more recent PRICE.

• Most widely used of all technical indicators

Weighted Moving Average

• The CQG weighted moving average assigns weights

linearly, assigning greater weights to more recent data

points.

• Example:

• A 21 period weighted moving average would be calculated

as follows:

• [21 * Close (0)] + [20 * Close (-1)] + [19 * Close (-2)]

+…….[1 * Close (-20)]

Exponential Moving Average Calculation • Exponential Moving Average Calculation

• For the following example the PERIOD = 3 and the PRICE = CLOSE.

• To calculate an Exponentially Smoothed Moving Average, (ESMA), the user must enter an integer value for the PERIOD or a decimal value Smoothing Constant.

• A decimal value Smoothing Constant must be greater than 0.0 and less than or equal to 2.0. Example: .5

• When an integer value is entered for PERIOD, the smoothing constant is converted by the system to a decimal value using the following formula:

• Smoothing Constant:

• = 2 / (PERIOD + 1)

• = 2 / (3+1)

• = 2 / 4

• = .5

• The Exponentially Smoothed Moving Average, ESMA, may be calculated after the Smoothing Constant is known.

• The first ESMA value is initially set to the first PRICE before the calculation begins. The first PRICE is from the leftmost bar on the screen.

• The formula for calculating the ESMA is as follows:

• ESMA = pESMA - ( Smoothing Constant X ( pESMA - PRICE ) )

• In the above formula:

• ESMA is the new Exponentially Smoothed Moving Average.

• pESMA is the Previous ESMA value.

• PRICE is the value of the PRICE used for each bar, e.g. CLOSE

• Note: A decimal value Smoothing Constant equal to 0.0 stops the ESMA from being displayed, however, an ESMA will appear if the integer 0 is entered without the decimal point.

Smooth Moving Average

• A Smoothed Moving Average is similar to a simple moving average. However, in a smoothed moving average, rather than subtracting the oldest value, as in a simple moving average, the previous smoothed average value is subtracted.

• For the following example the PERIOD = 3.

• First value is ready when Period first bars are accumulated.

• First value SMOOTH(1) = AccumulatedPrice / Period where AccumulatedPrice is a sum of Period input prices.

• Next value (say SMOOTH(N)) is calculated as:

• SMOOTH(N) = SMOOTH(N-1) + (Price(N) - SMOOTH(N-1)) / Period

• The next value would be plotted at the fourth bar from the left side of the screen.

• SMOOTH2 = (PREVIOUS SUM - PREVIOUS AVG + PRICE 4) / PERIOD

• For the second calculation of SMOOTH, PREVIOUS SUM is the sum of PRICE 1 + PRICE 2 + PRICE 3; and PREVIOUS AVG is the initial value of SMOOTH.

• The next value would be plotted at the fifth bar from the left side of the screen.

• SMOOTH = (PREVIOUS SUM - PREVIOUS AVG + PRICE 5) / PERIOD

• Subsequent values would be determined by subtracting the PREVIOUS AVG from the PREVIOUS SUM, adding the next more recent PRICE, then dividing by the PERIOD.

• Example:

• If the values 1,2,3,4 and 5 were reported for the first 5 bars the 3-period smoothed moving averages for those bars would be calculated as follows:

• (1+2 +3)/3 = 2

• This is the first value and would be plotted on the 3rd bar from the left.

• (6 - 2 + 4)/3 = 2.67

• This second value would be plotted on the 4th bar from the left.

• (8-2.67+5)/3 = 3.44

• This third value would be plotted on the 5th bar from the left.

Single Moving Average Cross

Two Moving Average Cross

Three Moving Average Cross

Ichimoku Cloud

• Trend following tool. Used heavily by Japanese traders,

especially currency traders. It is gaining popularity in the

United States.

• Ichimoku cloud system is comprised of five moving

averages. – Kijun (Trend) Line: (highest high + lowest low)/2 calculated over last 26

periods

– Tenkan (Signal) Line: (highest high + lowest low)/2 calculated over last 9

periods

– Chikou (Lagging) Span: Most current closing price plotted 26 time periods

back

– Kumo (Cloud) • Senkou Span A: (Tenkan line + Kijun Line)/2 plotted 26 time periods ahead

• Senkou Span B: (highest high + lowest low)/2 calculated over past 52 time periods, sent 26

periods ahead.

Advantages of the Ichimoku Clouds

• Trend identification

• Displays multiple levels of support and resistance, both currently and projects into the future.

• Comprised of moving averages with its strengths and weakness.

• Thickness of the cloud represents both the strength of the support or resistance and volatility. – Thin cloud is little support or resistance .

– Thick cloud is strong support or resistance.

• Price closes above the cloud, the trend is up.

• Price closes below the cloud, the trend is down.

• Price closes in the cloud, the market is sideways.

Ichimoku Cloud Chart

Elliott Wave

• A trend moves in five waves.

• A trend can be in either direction.

• A correction occurs in three waves.

• Wave 1

– In a bullish trend wave 1 is accumulation stage and the very

beginning of the new trend. Look for a bullish divergence between

price and RSI.

– Volume is declining as the previous trend comes to an end.

• Wave 2

– First retracement, retraces wave 1 but does not violate the low of

wave 1. This retracement should not retrace more than 61.8% of

the original move.

Ichimoku Cloud with Japanese Candlesticks

Elliott Wave 2

• Wave 3 – Usually the longest, strongest wave in the direction of the trend.

– Higher than wave 1.

– Volume and open interest accelerates

• Wave 4 – Countertrend trend wave.

– Wave 4 should not go lower than the low of wave 2.

• Wave 5 – Wave 5 is in the direction of the trend.

– Wave 5 is either the longest, strongest wave or second to wave 3.

– Wave 3 and Wave 5 are the strongest waves in the direction of the trend.

• A wave – In a bull market, A wave is bearish.

Elliott Wave 3

• Wave B – Wave B is an up wave.

– Should not take out the high of Wave 5.

• Wave C – Wave C is a down wave.

– Should take out the low of Wave B.

• Most often there is a 5 wave structure within the major 5 wave structure.

• The placement of the wave identifiers moves if new highs or lows are made. They can’t be used in trade systems.

• They are timing indicators and can identify which moves can be the ultimate high or low, but must be confirmed by other indicators such as RSI, MACD or slow stochastic.

• Elliott Wave works well with the Imoku Clouds.

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