During my last post on the “indicator series” we talked about the PSaR indicator and its many possible uses, I have some ideas about how users could use the PSaR to follow trends and how it could be used for the creation of mechanical strategies. On today’s post I am going to be talking about an expansion of this idea dealing with the use of the PSar and how we could deepen our studies through the use of two indicators which we can call “the yawn” and time oscillators. These two indicators derived from the PSaR provide an added layer of analysis which we can use in the creation of mechanical strategies for Forex trading. Within the following paragraphs I will talk about these indicators as well as some hints on their usage in automated trading. If you haven’t done this yet, please read the article I wrote before on the PSaR as I will be using knowledge derived from this article extensively.
As you know the PSaR indicator was created as one of the first ideas to help people capture trending movements successfully, it is in essence an indicator which shows a good way to follow the market to capture trending scenarios of varied lengths. By studying the PSaR’s characteristics and their evolution through time we can get an idea about the trending or non-trending character of a given instrument. The first tool we are going to use in our quest to better understand the PSaR is the Time indicator which allows us to know the percentage the current PSaR movement duration represents over the maximum length during the past X periods. It is a percentile adjusted oscillator which allows us to see how “deep” we are into an existing expected trend length.
Suppose that a currency pair tends not to trend and therefore the duration of PSaR movements is low. The Time oscillator will therefore increase rapidly as you will reach the longest trending movement quite easily. On the other hand if the instrument tends to trend a lot you will see that it takes more time to reach the maximum length as the instrument has shown some strong trends. How is this useful? By looking at how the oscillator behaves for each step of the PSaR continuation you can know how likely you are to face a reversal. For example on an instrument where the PSaR increases by 10% on each candle step you know that when you reach 100% you have a higher probability for a reversal and when the step is small you know that you have a good chance of capturing a very long trend if you enter soon. Analyzing long periods (for example 500) and looking at how the step evolves on a PSaR cycle is a good way to evaluate the trending/ranging character of an instrument.
The next indicator we are going to talk about is the “Yawn” indicator which was baptized in this was by Dave (my friend at “what really profits”) who gave it this name since the indicator tends to show “Yawns of the PSaR” (I suppose). The indicator simply shows a percentile adjusted oscillation of the difference between the PSaR and the open of the candle (he used the close but I used the open to make all drawn values final). For example if during the past 500 periods the PSaR difference has been a maximum of 100 pips then a current difference of 50 will be displayed as a 50% value on the oscillator. The Yawn is good for determining momentum increases as – depending on the instrument and time frame – this can mean two very different things. Usually – on higher time frames – a value of the Yawn close to 100% implies a reversal, especially if this value is calculated over long period (500 bars for example). The Yawn is also useful to add to positions as a high value followed by a low one is an indication of a trend retracement in which you can enter the trend with good risk to reward ratios.
Now things become even more interesting when we put together the Yawn and the Time indicators to analyze the PSaR, this becomes a powerful tool because we can now interpret the indicator in a much wider sense. The Yawn will tell us about probable momentum exhaustion while the time indicator – especially its step – will tell us how we should interpret the PSaR (should we trade or fade it ?). When you use this conjunction in analysis you can come up with some great mechanical systems to trade with the PSaR with even systems that use the long term time step as a way to know whether to capture trends or ranges and the Yawn indicator as a way to either get into trends with a higher opportunity on retracements or to capture full reversals at the top of ranges. This shows that something as simple as the PSaR can breed a whole variety of indicators which – if interpreted correctly – allow us to derive profitable strategies.
Please remember that indicators do not allow you to be profitable unless you understand what their calculations MEAN and tie this meaning with actual price action. When I look at a high Yawn I do not see a simple high number on an oscillator but a number that tells me that the current movement is close to its historical momentum highs which implies that I must get ready to either capture a retracement entry opportunity or enter to capture a full reversal depending on what the other aspects of the PSaR is telling me. It is not about blindly following a set of colors, lines and number but about UNDERSTANDING calculations and trading through their interpretation.
If you would like to learn more about algorithmic trading in the Forex market and how you too can build your own strategies to trade please consider joining Asirikuy.com, a website filled with educational videos, trading systems, development and a sound, honest and transparent approach towards automated trading in general . I hope you enjoyed this article ! :o)