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WILDER'S PARA SAR

Using Technical Analysis to Manage a REIT Portfolio Part II -- Parabolic

02/14/01 10:27:49 AM
by Dr. Michael J. Seiler

Does the Parabolic technical trading system work in a trending market?

Security:   N/A
Position:   N/A

The Parabolic trading system, so named because of the shape that results when the system is applied to a chart, is designed for use in trending markets. Once a trend has begun, the system allows for moderate anti-trend movements, but as the trend matures, the system's protective trailing stop (referred to as "stop-and-reverse (SAR)") follows the price movements at a progressively closer rate. Once the SAR is reached, an equal and opposite position is taken in the market. In fact, the Parabolic trading system always has you in the market with either a long or short position. The calculations for the Parabolic trading system are as follows:

SARbuy = SAR-1 + AF(Low - SAR-1)
SARsell = SAR-1 + AF(High - SAR-1)

where,
SAR-1 = Stop-and-reverse value from the previous price,
SARbuy = Stop-and-reverse price on the buy side,
SARsell = Stop-and-reverse price on the sell side,
High = the highest price since the initial position has been taken,
Low = the lowest price since the initial position has been taken,
AF = an acceleration factor.

The EasyLanguage code for the Parabolic trading system is posted at the end of Part II.

DATA AND RESULTS
As in Part I, I've used all 210 REITs in existence, dividing them up into classifications. The results are as follows:

 
Table 2 shows the results from applying the Parabolic trading system. The failure of this trading system is glaring as only one category of REITs is profitable. A second drawback to using this system to trade REITs is that over twice as many trades are involved as the RSI Oscillator system. This means that not only is the Parabolic system unsuccessful in terms of gross profitability, but you will also be charged more in transaction costs which will further reduce the net profitability. In short, the Parabolic system was a failure across all REITs types, all property types, and all but one sub-property type.

Parabolic Code Construction with EasyLanguage

I. Function

Inputs: AcclFact(NumericSimple);
Variables: Pos(-1), SAR(Close), AF(.02), HighValue(High), LowValue(Low);

If CurrentBar = 1 Then
    Pos = 1

Else
    If CurrentBar > 1 Then Begin
      If High > HighValue Then
        HighValue = High;

      If Low < LowValue Then
        LowValue = Low;

      If Pos = 1 Then Begin
        If Low <= Parabolic[1] Then
          Pos = -1; {Reverse Pos}

      End
      Else Begin
        If High >= Parabolic[1] Then
          Pos = 1; {Reverse Pos}

      End;

    End;


If Pos = 1 Then Begin
    If Pos[1] <> 1 Then Begin
      SAR = LowValue;
      AF = AcclFact;
      LowValue = Low;
      HighValue = High;

    End
    Else Begin
SAR = SAR[1] + AF * (HighValue - SAR[1]);
If HighValue > HighValue[1] AND AF < 0.2 Then
    AF = AF + MinList(AcclFact, (0.2 - AF));

End;
If SAR > Low Then
    SAR = Low;

If SAR > Low[1] Then
    SAR = Low[1];

End
Else Begin
    If Pos[1] <> -1 Then Begin
      SAR = HighValue;
      AF = AcclFact;
      LowValue = Low;
      HighValue = High;

    End
    Else Begin
      SAR = SAR[1] + AF * (LowValue - SAR[1]);
      If LowValue < LowValue[1] AND AF < 0.2 Then
        AF = AF + MinList(AcclFact, (0.2 - AF));

    End;
    If SAR < High Then
      SAR = High;

    If SAR < High[1] Then
      SAR = High[1];

End;
Parabolic = SAR;

II. Indicator

Inputs: AF(.02);
value1 = Parabolic(AF);

If CurrentBar > 1 Then
    Plot1(value1[1], "Parabolic" )

Else
    Plot1(Close, "Parabolic");


{Parabolic Alert Criteria}
If Close Crosses Over Plot1 Then
    Alert("Parabolic has issued a bullish alert")

Else
    If Close Crosses Under Plot1 Then
      Alert("Parabolic has issued a bearish alert");


III. Long Exit Signal

Inputs: Acceleration(.02), FirstBarMultp(1.5);
Variables: AF(0), StopPrice(0), MP(0), HighValue(0);

MP = MarketPosition;
If High > HighValue Then
    HighValue = High;


If MP = 1 Then Begin
    If MP[1] <> 1 Then Begin
      StopPrice = Low - Average(TrueRange, 3) * FirstBarMultp;
      AF = Acceleration;
      HighValue = High;

    End
    Else Begin
      StopPrice = StopPrice + AF * (HighValue - StopPrice);
      If HighValue > HighValue[1] AND AF < 0.2 Then
        AF = AF + MinList(Acceleration, 0.2 - AF);

    End;
    If StopPrice > Low Then
      StopPrice = Low;

    End;

    If MP = 1 Then
      ExitLong ("PT") Next Bar at StopPrice Stop;


        IV. Short Exit Signal

        Inputs: Acceleration(.02), FirstBarMult(3);
        Variables: SAR(0), AF(0), StopPrice(0), MP(0), LowValue(0);

        MP = MarketPosition;
        If Low < LowValue Then
          LowValue = Low;


        If MP = -1 Then Begin
          If MP[1] <> -1 Then Begin
            StopPrice = High + Average(TrueRange, 3) * FirstBarMult;
            AF = Acceleration;
            LowValue = Low;

          End
          Else Begin
            StopPrice = StopPrice - AF * (StopPrice - LowValue);
            If LowValue < LowValue[1] AND AF < 0.2 Then
              AF = AF + MinList(Acceleration, 0.2 - AF);

          End;
          If StopPrice < High Then
            StopPrice = High;

        End;

        IF MP = -1 Then
          ExitShort ("PT") Next Bar at StopPrice Stop


Part I - The RSI Oscillator

Part III - MACD



Dr. Michael J. Seiler


Title: Professor of Finance
Company: Hawaii Pacific University
Address: 1132 Bishop Street; Suite 504
Honolulu, HI 96813
Phone # for sales: 808-544-0827
Fax: 808-544-0835
E-mail address: mseiler@hpu.edu

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