The basic premise of the Parabolic SAR is to create a trailing stop that is at first far enough away from the initial buy so that retracements in the early stages of the trend do not stop you out of your position. As the trend matures the trailing stop moves closer and closer at an accelerating rate to recent local lows of the current price, until the stop is penetrated by adverse price movement and a sell signal is given (opposite logic applies for sell signal).
The shape, slope and speed of the SAR is controlled by three parameters, the starting (start) Acceleration Factor (AF), the increment (inc) that the AF can change when a new price high or low is made, and the maximum (max) AF. Because of the way the SAR is calculated, the shape of the SAR curve resembles a parabola, hence it's name.
Most software packages only allow one to vary the AF increment and the AF maximum, fixing the starting AF at 0.02. This restriction hampers the trend following abilities of the Parabolic. Many times as the SAR hugs the price curve, it is penetrated by a price bar by a small amount, causing the SAR to generate an opposite signal. The price then immediately turns around and resumes going in the direction it was going before this penetration occurred causing a costly whipsaw loss. Many of the whipsaws losses are caused by noise or randomness in the price series. Thus if the SAR is to represent the trend of a real price series it must have the capability to ignore penetrations of noise level amounts. To this end, I have modified the Parabolic SAR formula to include a variable that allows the SAR not to reverse unless penetrated by a defined amount. I define this new parameter as xo, for noise crossover increment.
The initial stop loss for the SAR after a buy signal is set at the lowest low encountered while in the previous sell signal or after a sell signal at the highest high encountered while in the previous buy signal. Many times this initial stop loss is not far away enough from the signal to prevent a whipsaw. To solve this problem I've added a fifth parameter called xprc, for "extra price" that is subtracted from the previous lowest low when a buy signal occurs so that the initial stop price is the lowest low minus xprc. On the other side, when a sell signal occurs the xprc is added to the previous highest high so that the initial stop price is the highest high plus xprc. Making the initial stop further away also makes the SAR curve take longer to catch up with the price curve further minimizing whipsaws in an initial stages of the signal.
I call this new five parameter Parabolic, parabxot.
Parabxot Input Parameters
The parabxot system is orientated to trading in all bar ranges (1 tic, 1 min, 5min, etc., daily) and with any tradable price series. This system can also be used on stock, options, and mutual fund data.
All of the EasyLanguage system and indicator codes are directly importable into TradeStation or MultiCharts and are fully disclosed. There are no locks of any kind on the EasyLanguage source code. The C++ DLL code is not disclosed. The Input parameters to the strategy and indicator are changeable and optimizable so that the user can develop his own parameter set on his price series and time frame of interest.
The accompanying manual consists of:
The system has its exact duplicate in indicator form which is displayable on the price chart and in the charts printout, so that the user can visually see how the buy and sell signals occur.
For TradeStation and MultiCharts The Five Parameter Parabolic Noise Filter System package consists of a manual, Strategy & Indicator eld files, and DLL file and is being offered through Meyers Analytics L.L.C. for $295. Shipping is via Email and consists of the Manual in Adobe PDF format, ELD file and DLL file. The Five Parameter Parabolic Noise Filter System DLL file has a "Key Licence" that only allows it to be installed on three computers.How To Order