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Trading method #2 (Parabolic SAR trading)

If you tried trading with Parabolic SAR for some time, you would notice that quite often, as soon as you enter a trade based on the first Parabolic SAR dot appearance, the market immediately turns against you, making your new trade start with a respectful loss.

Here is what I'm referring to:

Parabolic Sar trading method Forex

Another example:

Parabolic Sar trading method Forex

I have noticed that most of the times it is better to refuse Parabolic SAR first invitation and instead wait for a retracement to come. Price retraces about 80-90% of the time, which means that if you rush into a trade with PSAR new dot, 80-90% of the time you'll start your trading on a negative pips territory.

So, here is the question I haven't found the answer for yet:
What is the best way to catch that first retracement I know will come soon after the PSAR dot change?

Here is few raw ideas of mine:

1. Fibonacci retracement. With the first SAR dot, we skip the invitation to enter, instead watch price advancing, topping out (in an uptrend), then starting to descend, at which point we find the most recent swing high and low and draw Fibonacci retracement. The goal is to enter on 0.618 retracement. It is not a holy grail though...

2. There are Fractals and 14 SMA on both of my screenshots. So, what if we again skip the first invitation from Parabolic SAR, instead wait for price to retrace back closer to 14 SMA (or even touch it), as it does so, we go to a smaller time frame, where we will enter after the appropriate Fractal is formed.

As you can see, that's just an idea, but from my observations, it's the one you should remember about if you decide to chase a trade with Parabolic SAR indicator. I'm working on different versions to make things work with Parabolic SAR as it is a great indicator to trade with.



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Hi Edward,

Some thought to add to yours;

1. Markets do not move in a straight line so when the trend changes expect a pull back.
2. In view of this an entry point on the breach of the last dot of the current SAR trend
is a scalping trade. Take profit on the sign of a reversal and use it to fund the
next move.
3. Use your favoured indicator – CCI, Stochastic – and the SAR shape to ‘anticipate’ the
change and have an OTO in place ( move this as the current trend continues)
4. Moving averages – 10 & 5 exponential applied to close – will often give advanced
warning of a change in trend.
5. Use the low point from the first trade as the entry point for the second trade.
6. Unless you wish to scalp reversals only take trades in the direction of the longer
time frame trend. (I use the IG Index platform for trading and they have an indicator
called Super Trend which is useful – anyone know of an equivalent on Meta Trader 4)
7. Para SAR is not a good indicator when the market is ranging but a trade through the
SAR dots with a bolly band breakout usually results in a lesser and slower pullback
and thus a profitable trade.

Regards Paulk

Forgot to add that stops can be placed using the SAR dots. Paulk

Hi Edward,

you say that on the daily chart, the immediate reversal is not pleasant at all. I don't use the SAR indicator but, if your observations are correct, then why don't you trade AGAINST it and let the immediate reversal work for you and regularly scalp a few pips from each trade. This sounds obvious but I must be missing something because I'm sure you've thought about this.
regards
Andy

Hi Edward, I've found this really useful with another strategy I'm developing so many thanks. I analysed 10 successive trading opportunities on this new strategy involving Parabolic SAR and found; 3 had no retracement before the trade would have been closed the other 7 all retraced to the entry point or beyond shows how careful you need to be in placing your stop or when you move the stop to breakeven. It's helped a lot so many thanks Paulk

Thank you, Paulk

This summarizes the whole theory of using Parabolic Sar indicator.

Regarding the Super Trend indicator, I'm not sure if those two below are anywhere close, but anyway:

MTF_SuperTrend_Bar.mq4
sa_MTEI_Supertrend.mq4

Best regards,
Edward

oh dear me....looks like there's no edit function? My comment kind of ran together....sorry about that! Ghostman

First, let me compliment this site. I've been lurking for awhile and really enjoy this site. Kudos to all! Now, interestingly, Edward writes of his experiences using the SAR. I've been "riding the SAR" (my words) for awhile now with pretty good results. BUT, I use this technique on only the 5 minute, 10 minute, and 15 minute time frames. Thus, any "pullback" isn't quite so drastic for me as I imagine it might be on the Daily. I do several things to try and "soften" any pullbacks:

1. ADX: I use the ADX, default setting, as a "filter". If when the first "dot" appears, if the ADX is below 30-25, I step aside and DON'T enter. I either await the ADX to climb higher within the next several dots before I enter; OR, if ADX never "climbs upward", I just stand aside and pass on the whole trade.
** note, I mention a SAR in the 30-25 "range". I can't be more precise as it becomes more of an artistic choice than mechanical. If ADX has been "shuffling along" in the mid-twenties for awhile prior to the first dot, I'll require ADX to actually climb above 30. On the other hand, if ADX has been REALLY low (lower 20's into the "teens"), then if I see ADX making a nice upward climb at time of first dot, I'll probably enter even if ADX at precise time of entry is still only around "25ish" in reading.

2. The LONG candle: if the first dot is created by a LONG (long meaning size) candle, I tend to stay on the sidelines even if ADX has popped up above 30. I prefer to wait for the following candles to return to a more average "size" and then, if ADX is still looking good, I'll go ahead and enter. How do I define a "long" candle? Well, I don't have any mechanical measurement for this. I just go by what my eyes are seeing.

The above rules are good for buy or sell positions. One last thing. Even on the 5 minute time frame, I must constantly monitor the chart. As each new dot appears, I move my stop loss with the dot. I always keep my stop loss a few pips above/below each subsequent dot. This DOES make things pretty "high maintenance" (chuckle), but also keeps me from sustaining a huge loss when the trade simply goes against me.

Hope these thoughts are of some benefit. My best to all.

Ghostman

Very useful Ghostman
thanks

Paulk