CSS Parabolic Stretch Oscillator (PSO)
The last article introduced the PTO (Parabolic Time Oscillator) which is in my opinion a very unique approach that capitalizes on the appealing qualities of the PSAR. Following this logic, I thought I would raise the subject of another complementary idea– the Parabolic Stretch Oscillator. Both indicators will give you information about a market that the RSI14 or stochastic cannot give you since they are rolling momentum oscillators that have little or no memory. True bull euphoria or bear panics occur in a parabolic fashion (or inverse parabola), and thus what better to measure than a parabolic stretch.
The PSO is calculated the same way as the PTO only it measures volatility units earned during the trade instead of days in the trade. Thus the PSO would be calculated as follows:
1) Using the PSAR with default settings (but it is also worth exploring doing this for fast, medium and slow settings), measure the absolute value of the ATR (10) units gained/lost for new PSAR long or
short trades. Divide this figure by the market price at the opening of the trade.
2) Take the percentile ranking of the current trade movement in absolute ATR units vs the entry price in comparison to the last 100 trades. This is the PSO.
The PSO is also valuable as a guide to overbought/oversold since only very strongly trending markets can make significant gains versus the aggressive PSAR stop. The oscillator may be used in conjunction with the PTO to give an excellent composite view of how much a market has moved without a retracement. Furthermore, for trend-followers this can be used to guide in de-leveraging positions–a critical matter with leveraged futures trading– versus looking for an arbitrary floating profit target. The PSO is likely to be far more accurate at predicting a retracement at extremes, thus the saavy trader will seek to de-leverage a long position as the PSO hits very high levels and look to re-enter on the first pullback.