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An Indicator Concept Every Week? CSS Parabolic Time Oscillator (PTO)

March 17, 2011

Hello to all of my loyal readers, it has been far too long and truthfully I have missed posting my musing/ideas.  My recent departure was required to ensure a smooth transition for strategy deployment within the fund. I have decided to return to blogging as a means of enforcing creative output— believe it or not, the business of being involved 24/7  in operations, trading and marketing can cause a disruption in the flow of creative ideas. Paperwork isn’t too fun either…………. The interaction with a crowd of intelligent readers always keeps me stimulated– you just don’t realize the impact until you stop writing.

I have thought about how best to balance future blog posts, as I do not have the time or spare resources to do much backtesting these days outside of internal R&D. However, it occured to me that my most popular posts were not backtests, nor were they based upon elaborate analysis. Readers seem to enjoy the indicator and system concepts the most, and secondly some of my lengthy rants on the nature of the market and the building blocks of good system development. In fact, I remember the first time I connected with Corey Rittenhouse–my long-time partner in crime–was due to posting a system idea on Donchian channels. Early readers may note that I began several posts with results presented  in table format using my limited excel skills. No pretty graphs, no fancy backtests—thank Corey for that. So it is time to go back to basics, and I plan to present new indicator concepts every week. Don’t expect me to post code, don’t expect me to post backtests. However, I would encourage readers to code my concepts and post links for other readers to source that code so that everyone can benefit.

One thing is for sure……I probably won’t run out of ideas, but hopefully people can keep up. I hope that readers can help with this process. Code for Tradestation, Amibroker, E-Signal, Wealth-Lab, and all other major platforms are requested.

My first idea? How about a Parabolic Time Oscillator? I was thinking earlier this week that time is an important element of stretch but that looking at the time above moving averages or other measures doesn’t capture the extremity of the stretch. Then it occured to me that the Parabolic SAR by Welles Wilder is ideal because it has a stop that accelerates and stays very close to the highest high or lowest low of the move while in a position. Thus the Parabolic Time Oscillator (PTO) is calculated as follows:

1) Record the days in a Parabolic SAR long or short position until the trade reversed

2) Take the 100-trade percentile ranking of the days since the current position was initiated versus past trades. This is the PTO.

Alternative: you can do this separately for long trades versus short trades to create two oscillators PTOup and PTOdown.  Use only 50 trades to calculated the percentile ranking for each.

Applications:

Use this as an addition to an overbought/oversold indicator such as RSI or DV2. You can also use this as a trend follower or trend trader to use as a guide to liquidate positions. Presumably as a move becomes very stretched in time, the probability of further profit before a pullback declines as the PTO reaches extreme levels.  However, once a pullback occurs from high PTO levels, it is likely a sign of very high probability entries with the trend.

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