The indicator is graphically shown on the chart of an asset as a series of dots, which are placed either over or below the price—depending on the momentum of the asset. The indicator assumes the trader is fully invested in a position at any given time and tends to perform best in markets with a steady trend. Note that the calculation of the parabolic SAR is rather complex. Understanding the Parabolic SAR One of the most interesting aspects of this indicator is that it assumes a trader is fully invested in a position at any point in time.
For this reason, it is of specific interest to those who develop trading systems and traders who wish to always have money at work in the market. The parabolic SAR indicator is graphically shown on the chart of an asset as a series of dots placed either over or below the price depending on the asset's momentum.
A small dot is placed below the price when the trend of the asset is upward, while a dot is placed above the price when the trend is downward. Many traders will choose to place their trailing stop-loss orders at the SAR value, because a move beyond this will signal a reversal , causing the trader to anticipate a move in the opposite direction.
In a sustained trend, the parabolic SAR is usually far enough removed from price to prevent a trader from being stopped out of a position on temporary retracements that occur during a long-term trend, enabling the trader to ride the trend for a long time and capture substantial profits. In ranging markets, the parabolic SAR tends to whipsaw back and forth, generating false trading signals.
For example, if your Short trade entry level is 1. Example As you can see on the example chart above, there are five entry and exit points: The first one is bearish and goes to a take-profit. The second one is long and is also closed by TP. The next one is bearish again and reaches TP rather fast. Bullish trade that reaches its target in just two candles. Another short trade, slowly proceeding down to its take-profit level.
Judging from above it is easy to conclude that short and long positions always follow one after another in this strategy. You can also see that although take-profit helps to keep many of the trades in the green, it also prevents those trades from reaching their full potential. Use this strategy at your own risk. It is not recommended to use this strategy on the real account without testing it on demo first.
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These bands define take profit targets. There is also a gray middle-line. Escalda: it is a trend-direction filter. Ideally, they all should be blue for a buy trade or red for a sell trade. To be a profitable trader you need to master discipline, emotions, and psychology. It is crucial to know when to trade, but also when not to trade. Now select the file and click Open to load the system on your chart. A good forex strategy will most probably enhance your chance of success.
An aggressive approach like the one considered here is to use the last bullish SAR dot and consider a break below it to invalidate the bullish trend. For that, we need first to wait for a pullback the first one. Second, the low in place must hold. However, many traders like to keep the stop tight so to better control the drawdown in the trading account. In any case, the market failed to close below the last bullish dot. Moreover, it formed a new higher high, turning the SAR dots bullish again.
And the trend continues for more than two trading weeks when a new bearish SAR dot develops. Using the same aggressive principle, we see that, while dipping, the price failed to close below the last bullish dot. And, it made a new higher high, turning the SAR dot bullish again. The point here is to show how to discount the pullbacks in a trend by using the last bullish in this case SAR dot. This way, it is more comfortable to ride trends for as long as they hold.
However, some rules exist, and the first task is to determine if a trend is strong enough. How do you do that? The secret is to look for market swings with a pre-determined length. The Parabolic SAR indicator, while lagging, offers the advantage of keeping a bullish or bearish series running even if some candlesticks move in the opposite direction when compared with the primary trend.
Look for a minimum of ten consecutive dots to signal the start of a new trend. The more consecutive SAR dots, the higher the chances the trend is strong. And, the stronger the support or resistance level is. Furthermore, the higher the timeframe the Parabolic SAR strategy is applied, the stronger the support and resistance. From this moment on, I need your full attention. The Parabolic SAR strategy using support and resistance requires a different kind of thinking.
More precisely, the support or resistance do NOT refer to the actual price. But, to the SAR dots! Remember, at the start of this article, it was mentioned about the accelerator factor. And, the fact that dots are closer or further away from the candlesticks. This means that support or resistance varies too, as illustrated further.
Building Support Areas with a Dedicated Parabolic SAR Strategy After spotting a trend reversal, as explained earlier in the article, look for more than ten consecutive dots to form in the opposite direction. Just like in the chart above, where we see a series of ten SAR bullish dots. Moving forward, return to the last two bullish dots from the previous series and mark the distance between them using a shape provided by the MT4 or the trading platform you use.
The grey area marks the support for the bullish trend. The SAR bearish dots turn bullish again. Moving forward, another series of more than ten consecutive bullish dots forms. It means support held and a new support level, equally important, forms.
Focus on the SAR Dots Keep in mind that the support and resistance levels benefit from the interchangeability principle. Simply put, it means support turns into resistance and resistance into support when broken. Also, it means that traders are free to drag historical levels on the right side of the chart to find out future support or resistance levels. The second level of support still holds. The price, indeed, broke the support, but the focus, as mentioned earlier, sits with the bearish SAR dots.
As the chart above shows, no bearish SAR dot moved below support. Hence, the bullish conditions remain in place. It makes no sense to exit the long side. What happened next? Not only that the market made a new high, but the Parabolic SAR indicator pulled another series of more than ten bullish consecutive SAR dots.
Naturally, the series gives birth to a new support level, even higher this time. Eventually, the price breaks the last support. Important: The SAR dots move below it, as the previous chart shows. Finally, by dragging the previous support areas on the right side of the chart, traders find out potential levels where the PRICE might react. To be clear, without a proper risk-reward ratio minimum , meaning the reward must exceed the risk by a factor of 2 to 1 , any trading strategy makes no sense.
Obviously, no one knows beforehand if the trade will reach the desired target. However, following all the steps mentioned in this article, the chances are that in the end, even if stopped once or twice due to choppy conditions, the Parabolic SAR strategy will reward traders. Here are the two examples used. Remember: First, define the support level, as explained earlier. Next, consider the lowest SAR dot.
The risk, therefore, is from the lower dot in the support area to the lower SAR dot from the start of the bullish trend. Moving forward, use a trendline, and measure the risk. Furthermore, copy and paste it two times to find the risk-reward ratio. Aggressive traders trail the stop at various SAR dots in the bullish sequence, to make the most of the trade.
Or, book half the profits at the level and stay in for the extra pips that may come. In any case, the minimum came, with even risk-reward ratios both for the long and the short trade that followed.
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