This post was contributed by a guest author, and does not necessarily reflect the views of Richard or MovetheMarkets.com
I’ve been using a volatility stop for quite a while now. It helps to keep me on the right side of the action. Another huge benefit is the ability to ride a trend for larger profits.
I still haven’t been able to come up with a reliable way (in advance) to tell me if I should scalp for a few quick points or stay for the larger move. If someone has an answer to that question, I would love to hear it. IMO, the time of day, and key levels hold part of the answer.
On this chart, you can see a standard volatility stop (10,2 - red steps), and the parabolic SAR (black dotted line). I’ve highlighted two areas (blue) that perplex me. In the first instance, the SAR is much farther from the price action than the VS. In the second instance, there isn’t much difference. However, the SAR was actually closer when a good entry point presented itself.
The Parabolic SAR takes longer to catch up, but after a move starts, it seems to lock in more profits. There isn’t as much give back. It may have the added benefit of keeping you out of bad trades. The only problem is that it also keeps you out of decent trades. I may actually keep both on my chart for a few weeks, and see which one I like better. Or I could just go with the SAR, and trade stronger moves. That’s probably the most profitable scenario, but its not as much fun.
Edit: after reading this again, I think this paragraph holds the key.
Wilder’s acceleration factor (AF) is 0.02 for the initial calculation. Thereafter the AF is increased 0.02 every period there is a New High made. If a new high is not made then the AF is not increased from the last SAR. This continues until the AF reaches 0.2. Once the AF reaches 0.2 it stays at that value for all future SAR calculations until the trade is stopped out.
Naturally, if your playing breaks, then you would want to see that a new high/low was made (and that it holds).
This post was contributed by a guest author, and does not necessarily reflect the views of Richard or MovetheMarkets.com
February 12th, 2008 at 7:33 pm
What’s your funky double histogram?
Maybe important levels and time of day can give you an edge, but you just don’t know if a new move will stick or not, at least in my (dubious) experience…
February 12th, 2008 at 9:40 pm
if it takes out a previous high/low (runs stops), and there is real buying interest is what i’m talking about…no way to predict it…however, sometimes it doesn’t give an entry…it just keeps running
i would also say that playing the open gives a tradeable trend, but i normally need more information…i’m not keen on playing either way right out of the gate - even gap fades…and even the afternoon moves going into the close aren’t predictable…u either have to scalp or play trends…i can’t find a way to do both successfully