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>From my notes:
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Parabolic “Stop and Reverse” - J. Welles Wilder, Jr.’s book “New
Concepts in Technical Trading Systems”, 1978.
The SAR assumes that you are always in the market, either long, or
short, hence, the stop out point also becomes the new entry point,
opposite to the direction you were previously in.
SAR(tomorrow) = SAR(today) + AF(EP(trade) - SAR(today))”
AF is the acceleration factor, or “step” that MS uses as a variable.
EP is the 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.) In Wilder’s formula, the AF starts at .02,
and increments by that amount until it reaches a maximum of .20, hence
the parabolic tendency of the SAR. MS allows you to adjust either the
step, or the maximum.
This formula continues on until you are stopped out, which in this
system reverses your position. On taking an initial position, you
need to know where to begin the SAR(today). If you have entered long,
then the SAR(today) is equal to prior LO SIP (lowest significant
price), which Wilder describes as the lowest low of the prior few
days. He doesn’t pin it down. If your initial entry is a short
position, then the SAR(today) is equal to the prior HI SIP.
-÷ Chris ß ÷-
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