Technical Indicators: P (part 1)
Parabolic Stop and Reversal (PSAR)
Described by Welles Wilder in his 1978 book, "New Concepts in Technical Trading Systems," the Parabolic SAR (PSAR) sets trailing price stops for long or short positions. Wilder was looking for a system that could capture most of the gains in a trending market without relying on some external method to retain profits.
To use, let the dotted lines below the price establish the trailing stop for a long position and the lines above establish the trailing stop for a short position. At the beginning of a move, the Parabolic SAR will provide a greater cushion between the price and the trailing stop. As the move gets underway, the distance between the price and the indicator will shrink, making a tighter stop-loss as the price moves in a favorable direction.
Percentage Volume Oscillator (PVO)
The Percentage Volume Oscillator (PVO) is the percentage difference between two moving averages of volume. The indicator is calculated with the following formula:
PVO = ((Vol 12-day EMA - Vol 26-day EMA)/Vol 12-day EMA) x 100
Because of its formula, the PVO has a maximum value of +100, but no minimum value. The absolute value is not as important as the direction or the crosses above and below the zero line.
The PVO can be used to identify periods of expanding or contracting volume in three different ways:
· Centerline Crossovers:
Like the PPO, the PVO oscillates above and below the zero line. When PVO is positive, the shorter EMA of volume is greater than the longer EMA of volume. When PVO is negative, the shorter EMA of volume is less than the longer EMA of volume. A PVO above zero indicates that volume levels are generally above average and relatively heavy. When the PVO is below zero, volume levels are generally below average and light.
· Directional Movement:
General directional movement of the PVO can offer a quick visual assessment of volume patterns. A rising PVO signals that volume levels are increasing and a falling PVO signals that volume levels are decreasing.
· Moving average crossovers:
When PVO moves above its signal line, volume levels are generally increasing. When PVO moves below its signal line, volume levels are generally decreasing.
Movements in the PVO are completely separate from price movements. As such, movements in PVO can correlated with price movements to assess the degree of buying or selling pressure. Advances combined with strength in the PVO would be considered strong. Should the PVO decline while a security's price fell, it would indicate decreasing volume on the decline.
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Polarized Fractal Efficiency
Developed by Hans Hanula, the Polarized Fractal Efficiency indicator draws on Mandelbrot and fractal geometry to illustrate the efficiency of how pricing moves between two points over time. The more linear and efficient the price movement, the shorter the distance the prices must travel.
Use the PFE indicator to measure how trendy or congested the price action is. PFE readings above zero indicate that the trend is up and the higher the reading the "trendier" and more efficient the upward movement. PFE readings below zero mean that the trend is down. The lower the reading the "trendier" and more efficient the downward movement. Readings near zero indicate choppy, less efficient movement and a balance between supply and demand.
A hooking pattern often occurs right before the end of an efficient period. This pattern occurs when the PFE appears to have maxed out, turns in the opposite direction towards zero, and then makes one last attempt at maximum efficiency. Trades can be entered in the opposite direction, with a stop just beyond the extreme of the hook. Stay with the trade all the way to the other extreme, unless it slows around the zero line. If it slows around zero, exit the trade and wait for a new maximum efficiency entry.
Polychromatic Momentum
One problem with momentum based indicators is that the optimum lookback period seems to change over time. Dr. Dennis Meyers' Polychromatic Momentum is one momentum indicator that deals with this by using a unique weighting concept that combines multiple look-back periods and provides a basis for a profitable short-term trading strategy.
Following the curve of Polychromatic Momentum, go long when the curve moves above the green Polychomatic Momentum buy (bxo) level and go short when the curve moves below the red Polychromatic Momentum sell (sxo) level.
Positive Volume Index
The Positive Volume Index by Norman Fosback is the companion to his Negative Volume Index. The two are used to identify bull and bear markets.
Positive Volume Index makes the assumption that the uninformed crowd dominates trading on active days. On days when volume increases, the crowd-following "uninformed" investors are in the market.
The PVI displays what the not-so-smart-money is doing just as the Negative Volume Index displays what the smart money is doing. However the PVI is not a contrarian indicator. While Fosback says the PVI shows what the uninformed may be doing, it still trends in the same direction as price.
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