Lesson 6: The Parabolic SAR (Parabolic Stop and Reverse)
The next indicator of technical analysis, you should pay attention to the process of learning Forex - Parabolic SAR (parabolic stop and reversal, SAR). This indicator was developed by Welles Wilder (J. Welles Wilder Jr.), The famous trader who made a great contribution to the research and development of the technical analysis of financial markets. Applying this indicator properly, you will be able to significantly reduce the number of trading errors, and, consequently, increase profits.
Parabolic SAR indicator system got its name because of the form that it takes a curve on the chart. The parabolic form of the indicator is explained by a mathematical formula for its calculation, which will be discussed below. An important condition for the application of this indicator in the analysis of the Forex market is the presence on the roar explicit trend - in this case, the indicator may give a good signal weakening trend or its reversal, ie good signal for closing position in one direction and its possible opening to another. If the price fluctuation occurs in a horizontal range, this indicator can give a lot of false signals. So, before you use this indicator and rely on its signals should confirm the existing trend in the market analyzed by currency pair. You can use these tools of technical analysis, examined above, and the levels of support and resistance lines, shapes, trend reversal, trend continuation patterns, moving averages, Bollinger bands, convergence-divergence of moving averages, etc.
On the example of quotation USD / JPY indicator Parabolic SAR system is shown in Fig.
As can be seen from the figure, the indicator is the curve formed by dots. Each dot corresponds to your sales period depending on the scale of the price chart, but, as a rule, are used daily charts. If the curve indicator is under the price chart, it indicates an upward trend. If the curve is above the indicator price indicator, indicates a downward trend. In that moment, when the curve crosses the indicator price chart trend strength decreases and there is a high probability of a reversal. Approximation of parabolic curve SAR system to a price chart indicates weakening trend. The distance between adjacent points of the indicator also symbolize the strength of the trend - the greater the distance, the stronger the trend. But remember that the trend may reverse at high speed!
As you can see, the curve of the indicator is not continuous. At the time of intersection of the curve with the price schedule, the next point indicator as it jumps in the opposite direction relative to the price chart. This behavior of the parabolic curve of SAR is sufficiently precise algorithm of its construction. This algorithm is based on two concepts: an extreme point (extreme point) and the acceleration factor (acceleration factor). At the extreme point of the uptrend is considered the highest price recorded in the trend. On a downward trend this point is a minimum fixed price. As soon as the indicator of the parabolic SAR system signals a trend reversal, the algorithm calculating extreme reversed. When a signal occurs, the acceleration factor is reset to the initial value for which in practice is often used value of 0.02, ie 2%. When the closing price of the current trading period on an uptrend surpasses last committed point of extremum, this ratio increases to 2%, and the value of extreme updated. The same increase in acceleration factor and updated extreme occurs if the closing price of the current trading period is less than the extreme points on a downward trend. The indicator is calculated ahead, ie data for the current day are used in the calculation of the indicator value tomorrow. The mathematical formula for calculating the indicator parabolic SAR system is recursive and has the form:
SAR (n +1) = SAR (n) + AF * (EP - SAR (n)),
where the SAR (n +1) - the value of the indicator of tomorrow, SAR (n) - an indicator of the current value of the day, AF - accelerating factor and EP - the last committed an extreme point. In addition, in the process of calculation of the indicator used by several additional conditions:
if its value is tomorrow's SAR (n +1) is within or outside the price range today (n) or yesterday (n-1) of the trading day, then it is set to the lower limit of this range. For example, if an upward trend, the indicator value is more than the minimum price fixed for the last two days, including today, the indicator takes the value of the fixed minimum price, a down trend the opposite is true;
if its value is tomorrow's SAR (n +1) is within or outside the price range of tomorrow, it is a signal of a trend reversal, and the algorithm for calculating the indicator to toggle the "phase".
Once there is a change trend that switch "phase" of the algorithm, the value of the indicator parabolic SAR system for the new trend set in the last committed point of extreme EP old trend. The very extreme point at this point is set to the maxim, if the new trend - rising in the minimum point, if the new trend - downward. Acceleration factor AF is reset to the initial value of 2%.
Parabolic SAR indicator system can be used as a stop-loss signal in the bidding process in the Forex market. The value of technical indicators are always lagging behind the price, so at the time of entry into the market can be easily set stop-loss in the current value of the indicator. But first make sure that such an approach does not violate your strategy for managing capital in trading on the Forex market. Parabolic SAR indicator system can also be used as both a take-profit signals at a time when the curve indicator closely approaching the price chart or crosses it. About types of trading signals will still be covered in later chapters Portal in learning forex trading.
An important observation, as already noticed, is that this indicator can give a lot of false alarms, if trading in the currency pair are in a horizontal range. This indicator should be used only if the trend can be confirmed by other technical analysis tools. Generally speaking, Internet trading should never be accompanied by a decision on the basis of only one tool of technical analysis - always use a few such tools. Take your trading decisions to open or close positions only if the most used tools you give the same trading signal.
After crossing the indicator curve parabolic SAR system with a price schedule, wait until the indicator next few points will confirm the formation of a new trend, and only open position. Close your position at the time when the curve indicator closely approaching the price chart and crosses it. The indicator gives a signal with a delay, so if you close your late position, you will lose some profit. Keep in mind that after the formation of a new trend is confirmed by his power distance between adjacent points of the curve indicator - the more such a distance, the more pronounced trend. Typically, the acceleration of the trend occurs after 4-5 points, so this acceleration can be a good confirmation of the correctness of the decision in the course of trade of trading on the Forex market. To enter the market at a time when the trend has already gained some strength, can be dangerous because of the high probability of the return of corrective movement or trend reversal. So it is risky to open positions at a time when the distance between the points of the curve indicator parabolic SAR system is large. Later in the process of learning Forex trading on the information portal Forex Arena we consider the stochastic indicator, which allows to determine the price chart of the market stress zone - zone "overbought" and "oversold". The combination of the indicator with the indicator parabolic SAR systems can provide good trading results.
Elliott Wave
It's no secret that many of the phenomena and processes in life are cyclical. We have all heard the expression that the story develops in a spiral, and already taking place in the past events are repeated in his new incarnation. Financial markets in this context - is no exception. In this chapter, we will look at Elliott Wave as a tool for wave analysis of the Forex market.
In one of the previous chapters we have considered the Dow theory, which is the foundation of the technical analysis of financial markets. This theory has been redesigned accountant Ralph Nelson Elliott and further developed in his book "The Wave Principle", which was released to the press in the thirties of the 20th century. Initially, Elliott waves have been created to analyze the liquid assets of the stock market, but subsequently were successfully applied to analyze the Forex market.
Elliott began creating his theory after retirement, attempting to find patterns in the seeming chaos of market movement. They had done a tremendous amount of work, which resulted in the calculations for the mass psychology of the market participants. Elliott came to the conclusion that the behavior of the market price is determined by a cyclical, which is based on behavior psychology of traders in the market. This recurrence, according to the author, reflected in the appearance on the chart so-called market assets waves, which became known as the Elliott Wave.
According to the Elliott wave theory, the market can be in two states or phases - bullish and bearish. The current phase of the market is determined by the trend. Elliott drew conclusions that any movement in the financial markets is divided into five waves in the direction of the main trend of the price and three corrective waves in the opposite direction. In order to understand the above, let's look at the figure, which discussed the situation in the bull market.
All Elliott Wave are divided into two types: the pulse wave and the rollback. On the considered wave figure 1-5 are the main market dominated by bullish sentiment. Three of them (1, 3 and 5) are pulsed so as to place the main movement direction, and the remaining two (2 and 4) are the waves roll. AC are corrective waves, and two of them (A & C) are pulsed, as confirmed by the corrective movement. Wave B is a wave retracement correction.
One important property possessed by the Elliott Wave is the principle of nesting. Any wave can be up to a certain limit is subdivided into smaller waves, and she is part of a long wave. Pulse wave thus classified into five fundamental waves and the waves roll into three corrective wave.
Elliott highlights in his theory of the longest cycle and gives it the name "Grand Supercycle", which is 8 waves. Each of these waves are divided into a series of short-wave to a degree resolution hierarchy. But it is worth noting that clearly expand the market for Elliott Wave is not always possible - the theory is often at odds with the practice.
By analyzing a large sample of data, the author of the wave theory came to the conclusion that the Elliott Wave have a certain regularity. In particular the ratio of wavelengths belonging to one series are often interrelated. To express the relationship is often used so-called Fibonacci numbers, which will be discussed in a later chapter.
Thus, the wavelength 2 is often defined as 0.382, 0.5, or 0.618 of the wavelength 1. 3 Wavelength often defined as 0.618, 1.618, or 2.618 of the wavelength 1. Wavelength 4 is often defined as 0.382, or 0.5 times the length of wave 1. The length of wave 5 is often defined as 0.382, 0.5, or 0.618 of the length of wave 1. A wavelength is often defined as 0.618 or 0.5 or 1 of the wavelength 5. Wavelength B is often defined as 0.382, or 0.5 times the length of wave A. Wavelength C is often determined as 0.618, 0.5, or 1.618 of the wavelength A. Several modifications of the original theory, Elliott Wave exhibit and another relationship. The above factors are a sort of "magic numbers" are calculated by a certain algorithm and will be addressed in light of Fibonacci numbers in a later chapter.
It is considered that the above calculations are corroborated by the classic market with an accuracy of 10-20%. The error is the result of various factors, which are an integral part of the financial markets. Objectively speaking, this formula is, of course, very conventional. In addition to the above relationships, the ratio of the size of the Elliott wave to any other wave cycle can also be expressed in terms of Fibonacci numbers. By Elliott Wave size can be understood as its height in the graph of the financial instrument and the actual duration. Each wave has its own characteristics, which will be discussed below for a bull market.
Wave 1 occurs when the market is almost entirely dominated by bearish sentiment, and financial news is still on the side of the bears. This wave is usually very strong, especially if it is accompanied by dramatic changes in the technical or fundamental aspect (for example, breaking through resistance or evidence of an unexpected change in interest rates). If drastic changes in the market does not suffer, then this wave is a little impulsive move.
Wave 2 occurs when you roll back from that just reached the bulls profitable positions. This rollback can almost offset the price movement reached wave 1, but lower than its beginning rollback does not usually happen. Wave 2 can be explained by the fixation of nervous bulls have just achieved profits in fear of the return of the price movement. Wavelength 2 is typically 50-70% of the wavelength 1.
Wave 3 is the subject of "search" of all the supporters of Elliott Wave Theory. It is the "catch this wave" can make the most profit. This wave is characterized by a sharp rise in optimism among professional traders. It is in 90% of cases, is the most powerful and long, it accounts for the maximum acceleration of prices. Typically, wave 3 is accompanied by an increase in trading volumes. In a classic case of wave 3 than wave 1 is at least 1,618 times.
Wave 4 corrects the rapid rise in the opposite direction. Despite the fact that the identification of the waves on historical chart presents no great difficulties in determining initiation of real time is difficult. Rollback is typically at a distance of 35-45% in the wavelength 3, and the duration of corrective movement is small. In a classic case of wave 4 should not overlap wave 2.
Wave 5 is often characterized by the fact that is not supported by an increase in trading volumes. It is sometimes said that the impulse is the divergence, ie, there is an increase in the price dropping to medium volumes. By the end of wave 5, trading volumes are increasing again. At this stage, the main motion (along the prevailing trend) and ends with a transition to a series of corrective waves.
A wave is characterized by a market situation in which the bulls are beginning to boom fix lucrative position. On the market there are players who are inclined to predict a further fall in prices stable. This wave is pulsed and its properties are similar to the one considered wavelength (in the reverse direction).
B is an analogue wave wave 4 in the opposite direction and is also quite difficult to identify in real time. This wave is characterized by a residual price movement upward pressure of the few bulls who believe in a further increase in the price of the underlying asset.
Wave C is an impulse sharp downward movement against the increasing bearish sentiment. This wave by extension, in the classical case, the length of wave 3. By the end of the waves in the market bulls reappear, ready to take risks.
Everything looks good in theory, but in practice the Elliott wave is difficult to identify - the market does not always behave in accordance with the scheme described. What is clearly visible on historical data analysis is often blurred in real time. We have considered only the classical picture of alternating waves. But there are a large number of non-standard configuration patterns of waves and recommendations for action. Elliott wave analysis made using a graphical analysis of the figures (Figures trend reversal and trend continuation patterns), we have discussed earlier. We consecrate the basics of Elliott Wave Theory - for more information, if desired, you need to refer to the literature.
The next indicator of technical analysis, you should pay attention to the process of learning Forex - Parabolic SAR (parabolic stop and reversal, SAR). This indicator was developed by Welles Wilder (J. Welles Wilder Jr.), The famous trader who made a great contribution to the research and development of the technical analysis of financial markets. Applying this indicator properly, you will be able to significantly reduce the number of trading errors, and, consequently, increase profits.
Parabolic SAR indicator system got its name because of the form that it takes a curve on the chart. The parabolic form of the indicator is explained by a mathematical formula for its calculation, which will be discussed below. An important condition for the application of this indicator in the analysis of the Forex market is the presence on the roar explicit trend - in this case, the indicator may give a good signal weakening trend or its reversal, ie good signal for closing position in one direction and its possible opening to another. If the price fluctuation occurs in a horizontal range, this indicator can give a lot of false signals. So, before you use this indicator and rely on its signals should confirm the existing trend in the market analyzed by currency pair. You can use these tools of technical analysis, examined above, and the levels of support and resistance lines, shapes, trend reversal, trend continuation patterns, moving averages, Bollinger bands, convergence-divergence of moving averages, etc.
On the example of quotation USD / JPY indicator Parabolic SAR system is shown in Fig.
As can be seen from the figure, the indicator is the curve formed by dots. Each dot corresponds to your sales period depending on the scale of the price chart, but, as a rule, are used daily charts. If the curve indicator is under the price chart, it indicates an upward trend. If the curve is above the indicator price indicator, indicates a downward trend. In that moment, when the curve crosses the indicator price chart trend strength decreases and there is a high probability of a reversal. Approximation of parabolic curve SAR system to a price chart indicates weakening trend. The distance between adjacent points of the indicator also symbolize the strength of the trend - the greater the distance, the stronger the trend. But remember that the trend may reverse at high speed!
As you can see, the curve of the indicator is not continuous. At the time of intersection of the curve with the price schedule, the next point indicator as it jumps in the opposite direction relative to the price chart. This behavior of the parabolic curve of SAR is sufficiently precise algorithm of its construction. This algorithm is based on two concepts: an extreme point (extreme point) and the acceleration factor (acceleration factor). At the extreme point of the uptrend is considered the highest price recorded in the trend. On a downward trend this point is a minimum fixed price. As soon as the indicator of the parabolic SAR system signals a trend reversal, the algorithm calculating extreme reversed. When a signal occurs, the acceleration factor is reset to the initial value for which in practice is often used value of 0.02, ie 2%. When the closing price of the current trading period on an uptrend surpasses last committed point of extremum, this ratio increases to 2%, and the value of extreme updated. The same increase in acceleration factor and updated extreme occurs if the closing price of the current trading period is less than the extreme points on a downward trend. The indicator is calculated ahead, ie data for the current day are used in the calculation of the indicator value tomorrow. The mathematical formula for calculating the indicator parabolic SAR system is recursive and has the form:
SAR (n +1) = SAR (n) + AF * (EP - SAR (n)),
where the SAR (n +1) - the value of the indicator of tomorrow, SAR (n) - an indicator of the current value of the day, AF - accelerating factor and EP - the last committed an extreme point. In addition, in the process of calculation of the indicator used by several additional conditions:
if its value is tomorrow's SAR (n +1) is within or outside the price range today (n) or yesterday (n-1) of the trading day, then it is set to the lower limit of this range. For example, if an upward trend, the indicator value is more than the minimum price fixed for the last two days, including today, the indicator takes the value of the fixed minimum price, a down trend the opposite is true;
if its value is tomorrow's SAR (n +1) is within or outside the price range of tomorrow, it is a signal of a trend reversal, and the algorithm for calculating the indicator to toggle the "phase".
Once there is a change trend that switch "phase" of the algorithm, the value of the indicator parabolic SAR system for the new trend set in the last committed point of extreme EP old trend. The very extreme point at this point is set to the maxim, if the new trend - rising in the minimum point, if the new trend - downward. Acceleration factor AF is reset to the initial value of 2%.
Parabolic SAR indicator system can be used as a stop-loss signal in the bidding process in the Forex market. The value of technical indicators are always lagging behind the price, so at the time of entry into the market can be easily set stop-loss in the current value of the indicator. But first make sure that such an approach does not violate your strategy for managing capital in trading on the Forex market. Parabolic SAR indicator system can also be used as both a take-profit signals at a time when the curve indicator closely approaching the price chart or crosses it. About types of trading signals will still be covered in later chapters Portal in learning forex trading.
An important observation, as already noticed, is that this indicator can give a lot of false alarms, if trading in the currency pair are in a horizontal range. This indicator should be used only if the trend can be confirmed by other technical analysis tools. Generally speaking, Internet trading should never be accompanied by a decision on the basis of only one tool of technical analysis - always use a few such tools. Take your trading decisions to open or close positions only if the most used tools you give the same trading signal.
After crossing the indicator curve parabolic SAR system with a price schedule, wait until the indicator next few points will confirm the formation of a new trend, and only open position. Close your position at the time when the curve indicator closely approaching the price chart and crosses it. The indicator gives a signal with a delay, so if you close your late position, you will lose some profit. Keep in mind that after the formation of a new trend is confirmed by his power distance between adjacent points of the curve indicator - the more such a distance, the more pronounced trend. Typically, the acceleration of the trend occurs after 4-5 points, so this acceleration can be a good confirmation of the correctness of the decision in the course of trade of trading on the Forex market. To enter the market at a time when the trend has already gained some strength, can be dangerous because of the high probability of the return of corrective movement or trend reversal. So it is risky to open positions at a time when the distance between the points of the curve indicator parabolic SAR system is large. Later in the process of learning Forex trading on the information portal Forex Arena we consider the stochastic indicator, which allows to determine the price chart of the market stress zone - zone "overbought" and "oversold". The combination of the indicator with the indicator parabolic SAR systems can provide good trading results.
Elliott Wave
It's no secret that many of the phenomena and processes in life are cyclical. We have all heard the expression that the story develops in a spiral, and already taking place in the past events are repeated in his new incarnation. Financial markets in this context - is no exception. In this chapter, we will look at Elliott Wave as a tool for wave analysis of the Forex market.
In one of the previous chapters we have considered the Dow theory, which is the foundation of the technical analysis of financial markets. This theory has been redesigned accountant Ralph Nelson Elliott and further developed in his book "The Wave Principle", which was released to the press in the thirties of the 20th century. Initially, Elliott waves have been created to analyze the liquid assets of the stock market, but subsequently were successfully applied to analyze the Forex market.
Elliott began creating his theory after retirement, attempting to find patterns in the seeming chaos of market movement. They had done a tremendous amount of work, which resulted in the calculations for the mass psychology of the market participants. Elliott came to the conclusion that the behavior of the market price is determined by a cyclical, which is based on behavior psychology of traders in the market. This recurrence, according to the author, reflected in the appearance on the chart so-called market assets waves, which became known as the Elliott Wave.
According to the Elliott wave theory, the market can be in two states or phases - bullish and bearish. The current phase of the market is determined by the trend. Elliott drew conclusions that any movement in the financial markets is divided into five waves in the direction of the main trend of the price and three corrective waves in the opposite direction. In order to understand the above, let's look at the figure, which discussed the situation in the bull market.
All Elliott Wave are divided into two types: the pulse wave and the rollback. On the considered wave figure 1-5 are the main market dominated by bullish sentiment. Three of them (1, 3 and 5) are pulsed so as to place the main movement direction, and the remaining two (2 and 4) are the waves roll. AC are corrective waves, and two of them (A & C) are pulsed, as confirmed by the corrective movement. Wave B is a wave retracement correction.
One important property possessed by the Elliott Wave is the principle of nesting. Any wave can be up to a certain limit is subdivided into smaller waves, and she is part of a long wave. Pulse wave thus classified into five fundamental waves and the waves roll into three corrective wave.
Elliott highlights in his theory of the longest cycle and gives it the name "Grand Supercycle", which is 8 waves. Each of these waves are divided into a series of short-wave to a degree resolution hierarchy. But it is worth noting that clearly expand the market for Elliott Wave is not always possible - the theory is often at odds with the practice.
By analyzing a large sample of data, the author of the wave theory came to the conclusion that the Elliott Wave have a certain regularity. In particular the ratio of wavelengths belonging to one series are often interrelated. To express the relationship is often used so-called Fibonacci numbers, which will be discussed in a later chapter.
Thus, the wavelength 2 is often defined as 0.382, 0.5, or 0.618 of the wavelength 1. 3 Wavelength often defined as 0.618, 1.618, or 2.618 of the wavelength 1. Wavelength 4 is often defined as 0.382, or 0.5 times the length of wave 1. The length of wave 5 is often defined as 0.382, 0.5, or 0.618 of the length of wave 1. A wavelength is often defined as 0.618 or 0.5 or 1 of the wavelength 5. Wavelength B is often defined as 0.382, or 0.5 times the length of wave A. Wavelength C is often determined as 0.618, 0.5, or 1.618 of the wavelength A. Several modifications of the original theory, Elliott Wave exhibit and another relationship. The above factors are a sort of "magic numbers" are calculated by a certain algorithm and will be addressed in light of Fibonacci numbers in a later chapter.
It is considered that the above calculations are corroborated by the classic market with an accuracy of 10-20%. The error is the result of various factors, which are an integral part of the financial markets. Objectively speaking, this formula is, of course, very conventional. In addition to the above relationships, the ratio of the size of the Elliott wave to any other wave cycle can also be expressed in terms of Fibonacci numbers. By Elliott Wave size can be understood as its height in the graph of the financial instrument and the actual duration. Each wave has its own characteristics, which will be discussed below for a bull market.
Wave 1 occurs when the market is almost entirely dominated by bearish sentiment, and financial news is still on the side of the bears. This wave is usually very strong, especially if it is accompanied by dramatic changes in the technical or fundamental aspect (for example, breaking through resistance or evidence of an unexpected change in interest rates). If drastic changes in the market does not suffer, then this wave is a little impulsive move.
Wave 2 occurs when you roll back from that just reached the bulls profitable positions. This rollback can almost offset the price movement reached wave 1, but lower than its beginning rollback does not usually happen. Wave 2 can be explained by the fixation of nervous bulls have just achieved profits in fear of the return of the price movement. Wavelength 2 is typically 50-70% of the wavelength 1.
Wave 3 is the subject of "search" of all the supporters of Elliott Wave Theory. It is the "catch this wave" can make the most profit. This wave is characterized by a sharp rise in optimism among professional traders. It is in 90% of cases, is the most powerful and long, it accounts for the maximum acceleration of prices. Typically, wave 3 is accompanied by an increase in trading volumes. In a classic case of wave 3 than wave 1 is at least 1,618 times.
Wave 4 corrects the rapid rise in the opposite direction. Despite the fact that the identification of the waves on historical chart presents no great difficulties in determining initiation of real time is difficult. Rollback is typically at a distance of 35-45% in the wavelength 3, and the duration of corrective movement is small. In a classic case of wave 4 should not overlap wave 2.
Wave 5 is often characterized by the fact that is not supported by an increase in trading volumes. It is sometimes said that the impulse is the divergence, ie, there is an increase in the price dropping to medium volumes. By the end of wave 5, trading volumes are increasing again. At this stage, the main motion (along the prevailing trend) and ends with a transition to a series of corrective waves.
A wave is characterized by a market situation in which the bulls are beginning to boom fix lucrative position. On the market there are players who are inclined to predict a further fall in prices stable. This wave is pulsed and its properties are similar to the one considered wavelength (in the reverse direction).
B is an analogue wave wave 4 in the opposite direction and is also quite difficult to identify in real time. This wave is characterized by a residual price movement upward pressure of the few bulls who believe in a further increase in the price of the underlying asset.
Wave C is an impulse sharp downward movement against the increasing bearish sentiment. This wave by extension, in the classical case, the length of wave 3. By the end of the waves in the market bulls reappear, ready to take risks.
Everything looks good in theory, but in practice the Elliott wave is difficult to identify - the market does not always behave in accordance with the scheme described. What is clearly visible on historical data analysis is often blurred in real time. We have considered only the classical picture of alternating waves. But there are a large number of non-standard configuration patterns of waves and recommendations for action. Elliott wave analysis made using a graphical analysis of the figures (Figures trend reversal and trend continuation patterns), we have discussed earlier. We consecrate the basics of Elliott Wave Theory - for more information, if desired, you need to refer to the literature.
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