Trading method #2 (Parabolic SAR trading)

I am trying to make a strategy based exclusively on SAR. I dont know if its an illusion but is it true tha the dot can repaint itself (change) during the life of a bar? I work in 4 hour charts in MetaTrader 4 and i think i saw today a "buy" dot below the candle turned at the oposite direction after sometime. I wasnt all the time infront of the screen since 4 hour timeframe is a long time.
Isnt the dot permanent after the open of the candle?

Xander

I am fine

Hi George,

I believe that's the link to FXheatmap: http://fxtradeinfocenter.oanda.com/charts_data/fxheatmap.shtml

To find 45 degree angle you can also use Gann Fan drawing tool, which is available on some trading platforms.
For example, MT4 - http://ta.mql4.com/linestudies/gann_fan.

I never used this method by Gann, and I met only few traders who actually applied it, mostly for long term trading strategies.
There is another, more alive and actively researched study about trend angles - it is known as Moving average angle. Somewhere somehow it uses a similar idea - looking for an angle of a trend:
good average angle - healthy trend,
small MA angle - ranging market,
steep MA angle - acceleration, keep alert, prepare to lock in profits and exit or protect your gains.

Best regards,
Edward

Hi Edward,

Although a little off topic, I was thinking about what you said about finding a practical use for Gann theory. I have an idea that might be useful.

I remember reading in a technical analysis course I took through my university that Gann believed that certain numeric patterns had significance. One that caught my eye was when he said that the trend or a trending market has reached an optimal level when the angle is 45 degrees. I thought long and hard about how to apply this theory and then it hit me. On OANDA, they offer the heat map. As you know, this tool allow you to see the percentage changes from in month to month intervals. I thought of collecting all the percentage changes for each currency pair I trade and use these 12 observations and enter them on to an Excel worksheet and apply the coefficient of determination to the data sample. If the data sample is close to 1.0 either up or down, then that indicates that the trend is optimal. Since this hardly every happens, a reading closest to 1.0 is good enough. The closer to 1.0, the stronger the trend.

The reason why 1.0 is the best reading is that it correlates with what Gann was talking about when he wrote that a trend is optimal when it moves at a 45 degree angle. Although this information does lag, nonetheless, I have found that it does prove to be extremely useful for analyzing the strength of a trend.

Regards,

George

Hi Dinos,

Thank yo for sharing your ideas.

I've made a screeshot, which I think reflects the situation you've described: TEMA indicators crossed earlier and then we have a confirmation from PSAR.
In this case we go with the first SAR dot, no pullbacks or fractals needed.

Here is the indicator for MT4:

TEMA.mq4

Regards,
Edward

Hello all

Dinos here, another lurker, but I do frequent other sites. The psar can be very useful, but as you mention, entry is not on first site of the psar, try adding 2 TEMA's one set 13 & 1 set 40. For long set ups, the strongest set up is when the TEMA13 and the TEMA40 have already turned and then the psar arrives to confirm this momentum, wait until the of the open of the next candle to place the trade. If the 13 is above the 40, you are in a very strong trading position. Have a stoch set 10,6,3, if that also matches the above, its not often wrong

Hi Walter,

I've never heard of such 12 dots rule.
It it more safe? I'm not sure, because even after you wait for 12 dots, you'll still need to figure out the best place to enter a trade, plus your risks of getting on an ending trend (short term trend), will be much higher.

Regards,
Edward

from Walter Chan,

i was told can wait 12 dots before entering trade. more safe?

Thank you for sharing the results of your research with us as well as describing your trading approach with Parabolic SAR indicator.

Here is the conclusion, which is true for all trend indicators, including Parabolic SAR. They produce results, when a trend is in place. Despite common believes, the market spends most of its time moving sideways, which creates little to no opportunities to profit unless one changes a strategy to fit the ranging market. The result you've got - ability to trade only 25-30% of the time - matches well the percentage of the time when market is actually trending.
Trending market is the specialty of PSAR indicator.

By the way, I often use (0.01, 0.1) settings for Parabolic SAR.
I also use ADX 50 a lot, and sometimes ADX 30 as well.

Elliot, Fibonacci, Gann, Cycle theory etc - they all show the probabilities, as you've mentioned. They're not able to guarantee any outcome at any moment. I like to refer to them as an orientation mapping system where I have the ability to understand my current location and what conditions are surrounding me, but I can't tell exactly what will happen just around the corner at any moment.
All these theories should be used for a good reference, while in order to get a signal to enter/exit a trade here and now, I need to use a set of independent indicators or price patterns.

That's why indicators are the choice of majority of traders - indicators signal to buy/sell "here and now" instead of telling long stories about market situation and probabilities. I believe one needs to use what he/she knows and believes in best. For example, I still struggle to make a practical use of Gann theory, so until I find they way to apply it meaningfully, I will not use it or even be sorry about not using it.

Regards,
Edward

Hi Edward,

Is it possible to combine this strategy with the ADX 50? I was thinking that the only thing that is missing is a longer-term trend directional indicator. This combined with the above concept should prove useful.

When I tested the Parabolic SAR 0.02, 0.2 on Forex Strategy Builder without the SMA or EMA 14, the results were not all that promising. It tended to work better when you traded when the ADX was rising not falling and with tight stop losses of no more than 100 pips. It could only be used for a brief period of time perhaps only 25%-35%. The rest of the time, you could not really trade the ADX 50 PSAR 0.02, 0.2 strategy profitably over the long run. The reason why is due to the late entry that you highlighted here.

To correct this problem and create a more universal trading strategy that can be used more than 25-35% of the time requires an earlier entry. I was thinking that a SMA or EMA 14 would be good for this task as you have. However, on the correction there are still a number of false entries that still end up costing you a lot of money. In addition, the setting of stop losses becomes much more tricky as there is no Parabolic SAR dot to act as a guide. Volatility only increases the complexity of setting proper stops. As you know, when volatility is low the stops may be too wide and when volatility is high the stops may be too tight. This is an observation that I have made based upon day charts and where you decide to enter the trend. Usually, the beginning is more favorable and the crest of the trend is the least favorable.

The final problem is that at settings 0.02, 0.2, the Parabolic SAR tends to breakup too much and proves to be much too sensitive to be fully useful. Perhaps a settings of 0.01, 0.2 is better as it is less sensitive and helps to prevent over trading. However, despite these alterations, the SMA or EMA 14 sometimes proves to be too sensitive as well giving false signals.

Finally, the Elliot Wave, Dow and Fibanacci theories although true are not set in stone. They tend to act more as guides rather than absolutes. Sure, price does correct but not necessarily 0.618 nor does it always extend 1.618. In addition, the 3rd wave is not always the longest nor is the head and shoulders formation the end to a wave cycle. Often, the cycle will fail and become a double top or bottom respectively. In my opinion, although it is essential to be able to understand and conceptualize such information, seldom does it add a precise value upon which to base your exact entries.

Sadly, despite my best efforts, I could not create a profitable strategy over the last twenty years with this combination of ADX 50 and PSAR 0.02, 0.2 or even PSAR 0.01, 0.2 and EMA or SMA 14. I think that the best thing to do is simply accept that ADX 50 and PSAR 0.02, 0.2 or PSAR 0.01, 0.2 with tight stops of 100 pips with entry based only when the ADX is rising makes the best trading opportunities. Nothing else in my extensive testing seems to work consistently. Besides, with the strategy above, we are hunting for tops and bottoms that all great traders know is foolish.

Thank you for the useful insight, Ghostman

You're right about small time frames where such pullbacks there are not very annoying, in fact they are very suitable for scalping.
You have described very well the behavior of PSAR indicator and its relation to the price; and I like the way you choose SAR signals with a help of ADX indicator.

I'm sure it'll help many traders in their strategy building and trading. Thank you!

By the way, when a "long candle" emerges with a new Sar dot, try pulling Fibonacci retracement right on that candle alone and look for possible entries at 0.618 level. I used to scalp even on 1 min charts with this entry method - it keeps stops very tight and gets you the best deals on entries.

Best regards,
Edward

Very useful Ghostman
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

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