SMP Financial Engineering GmbH
52134 Herzogenrath, Weiherstr. 14, Germany
June 25, 2010
∗in cooperation with RWTH Aachen, Germany
In this paper, we introduce InOutBars SAR, a stop and reverse system based on the concept of outbars and following inbars.
The system follows up- and down–movements of an underlying price process with stop and reverse when the direction of the movement is changed. This SAR system is complemented by the intra–period stop process StopInOutBars, which is also based on the idea of outbars and following inbars
and thus gives an open position more space to move as long as an outbar is active.
Comprehensive tests show that these stop processes may be applied successfully when the market is in movement. Compared to other standard stops, the performance is competitive and often even better.
The concept of inbars and outbars is commonly used as trading concept to generate meaningful stops when the price process of an underlying stock is in movement (cf. ).
For instance, the candle stick chart of the price process in Figure 1 shows a clear up–movement in the first six bars. Each of these bars closes at a higher level than the whole range of the forerunner bar. In the seventh bar (17 o’clock) the buying power has not enough strength to again close above the range of the sixth bar. Since the body of the seventh bar stays within the range of the sixth bar, we call this bar an inbar or more precisely an initializing inbar; the forerunner bar is called an outbar.
Usually the price process, once an outbar is established, tends to consolidate, i.e. the movement of the price process is stopped for a while and the initializing inbar is followed by a series of further inbars with respect to the earlier established active outbar.
Once a new bar is able to close outside the range of the active outbar, either the up–movement is continued (in case the outbar is broken on the upper side), or a new down–movement is initialized (in case the outbar is broken on the lower side). Of course an up–movement can break down also instantaneously without having established an outbar beforehand. Figure 2 yields an example in terms of the 19 o’clock–bar which closes below the low of the forerunner.