Jai Ganesh !
Based on observations on price & interplay of EMAs, I present a Reloaded version of SMO SAR
This is one Leaner & Meaner algo & has has 3 areas of Improvement on Version 1:
Logical Insights & Maths behind SMO SAR ver.2:
1. Upward Breach of 5LEMA for Bull Run & Downward Breach of 5HEMA for Bear Fall is sufficient to satisfy C1 (that we have a POTENTIAL INFLECTION in Trend)
2. Exit pts are based SOLELY on CLOSE PRICES of the PRIOR 5 TRADING days
3. The maths for EMA says that the smoothing costant K= 2/(1+N) , for an N period EMA . The smoothing constant has been devised to give an EXPONETIAL "Tinge" to the CURVE.
But , from core MATH PERSPECTIVE--> this can be easily achieved by PARABOLIC REGRESSION.
Q : So , wot am i proposing here?
Ans : Simple. Just find the PARABOLA of BEST FIT for the 5 previous price closes & use its DIRECTION OF SLOPE as the INDICATOR to EXIT
IMPORTANT:
1. Core Math again warns that a PARABOLA is governed by a simple Quad Polynomial Eq as :
y(x) = A*x^2 + B*x + C
It is upto the ANALYST to DECIDE values of A, B & C to BEST FIT the given PRICE TREND
2. The Constants A, B & C can we worked out by VARIOUS CURVE FITTING Algos, the simplest of which is the Least Squares Non Linear Fitting Algo. This is the one I have been using in my day to day Analysis thus far.
Pls note there are a myriad other 2nd Degree Curve Fitting Algos that one can potentially employ to this case.
3. Another critical insight --> I realise that other
HIGHER DEGREE POLYNOMIALS Y(X^3, X^4, etc ) are equally VALID for representing the BEST FIT CURVE.
Improvements of SMO SAR ver.2 over 1
1. Faster Recognition of CHANGE IN DIRECTION (LEMA & HEMA breaches suffice C1)
2. Since we are now Modelling the 5 day LEAST SQUARES PARABOLIC REGRESSION Curve of the CLOSING price, The Pt of EXIT or TSL is much more ACCURATE
(earlier I had proposed finding out the Approximation of the Approximation ... initially we were calculating dy/dx of 5DEMA...
Btw, sorry for the headaches to all the MATH GEEKS, i was wondering why I was trying to model the CURVE Of the 5DEMA myself .. hahaha.. anyways, we improve for the better... :-D)
Scope for Improvements:
1. Finding the
"IDEAL" CURVE OF BEST FIT ................( it wud be never ending search, my view :-) )
2. One funny obsv with SMO SAR , is that we DONT SEEM to need the help of ANY OTHER REGULAR CLASSIC TA tools here , ....
there is presumably no need for seeing other OSCIALLATORS , FIBBO, Trend Lines, Momentum indicators..... seems a bit too Good to be true !!
3. The dy/dx of 5 day close price Best Fit--> gives us exits
way before RSI, MACD or TLs do3
4. SMO SAR catches trend no doubt, but wot about it, wen the Markets whipsaw ??
or, may be I have missed some thing that wud come out in phases of Narrow Rangebound plays... ??
Anyways,
am monitoring the performance of SMO SAR ver2.0 & over the coming days, Father Time shall provide the Answer to all these Questions, I Hope.
LEARNING S FROM SMO SAR ver.1
TREND IS THE ONLY FRIEND, & TRADE WITH A SYSTEM THAT WORKS ON PROBABILITY , RATHER THAN ON POSSIBILITIES
1. Trade ROBOTIC, Be Patient & Follow the TREND. It will reward u for the faith
2. High Probability Trades will emerge only when we allow the EVIDENCE OF TREND TO PRESENT ITSELF
The power of the universe is in Math, & in independent thought. Always has been, always shall be in times ahead too, and this is immaterial of who says it, coz its my firm belief that ....
ONLY NUMBERS TRULY REFLECT THE REALITY OF PRICE ;-)
cheers
