This section will look at some other techniques used in charts that may be considered advanced techniques; these are perhaps not critical to success, but when you learn them can provide additional insights. The chapter includes Parabolic SAR, Ichimoku Charts, Bollinger Bands, Directional Movement System ADX, and Market Sentiment.
Parabolic SAR – Stop and Reverse
The Parabolic system created by Welles Wilder is a popular trading system that gives extremely clear buy and sell signals. The SAR in the name means “Stop and Reverse.” In essence, this is a system that keeps you in the market all the time. When the indicator signals a “Buy,” you should buy the stock and go long. When it signals a “Sell,” you should sell the stock and go “Short.”
Other indicators like moving averages or oscillators may have a delay between when the stock changes direction and when a signal is generated; Parabolic SAR aims to improve the situation by adding two factors:
- Acceleration Factor Increase: A factor to accelerate the buy and sell signal responsiveness.
- Acceleration Factor Max: A factor to limit the acceleration of the signals.
Below is a chart of General Electric for 2009; you can see that the Parabolic SAR is plotted as a series of dots (this could also be a line). When the Dots are above the Price, this is a downtrend and is interpreted as a Sell or go short. When the Dots are below the price, this is an uptrend, and the signal is a Buy or go long.
The actual signal is when the price cuts through the Parabolic SAR line and the Dot move from above to below and vice versa. The signal is the first dot. The acceleration factors come into play when a stock has moved in a trend for a substantial amount of time; the indicator will then move the dots closer and closer to the price line as the trend slows or falters. This theoretically maximizes your gains. The two configurable parameters allow you to tweak the acceleration of the Dots to the price line.
The way this indicator works is quite impressive; however, it is not perfect; like most oscillators, when the stock is in a period of lateral consolidation or channeling, then many false signals may be produced, and losing trades can occur.
A great place to experiment with the Parabolic SAR indicator is over at FreeStockCharts.com.
Other Chapters of the Liberated Stock Trader Book are listed below
This chapter sets the stage for the two key areas of stock market technical analysis and the fundamental analysis of companies including macro and microeconomics
This chapter looks at what REALLY makes the markets move, what causes boom and bust cycles, and how to spot them.
What are stock market cycles and the cycles of business and economies? Important information that you need to appreciate as part of your core analysis.
Next we move into fundamental analysis and the financial fitness of a company. All the major indicators and measures are covered.
Stock screening means using criteria to shortlist the kind of stock that you want to purchase. A vital part of any stock market training
Once you know the business climate, the state of the economy and you have shortlisted the stocks you want to buy. The next thing to do is the technical analysis. Even if the company looks great on paper, if the stock price is plummeting you do not want to buy it until it has bottomed out. This is called catching a falling knife. This is what chart patterns and technical analysis help with.
Here we get into the art of drawing on charts to help you visualize the Supply and Demand on the stock, the direction of the trend, and estimate how long the trend will last. Vital for you to establish buy and sell signals.
Which indicators should you use, there are literally hundreds of stock chart indicators? Each has a specific use case and application, which should you use?
Volume is a vital indicator along with the price. Both of these you need to understand in granular detail, you will learn everything you need to know.
Moving to advanced technical analysis we cover indicators such as parabolic SAR and point & figure charts.
How are the market participants feeling? Positive, Negative, or indifferent. Consider that 90% of people fail to beat the average market returns, sentiment indicators can be a great contrary indicator. Learn how to use them to your advantage.
Understanding how you want to invest, how much time you have, and your time horizon. These questions all help you to understand what type of investor you want to be, this then enables you to select the right strategy for you. Then we move on to building your stock investing system, a critical element to your plan.