Learn Forex Trading - Part 4 - Technical Indicators cont.

More Technical Indicators - Parabolic Sar

In my last post Learn Forex Trading Part 3, I mentioned that I only use 2 techinical indicators on my charts. The Moving Averages (Simple and Weighted), The Parabolic Sar And sometimes MACD (Moving Average Convegence Divergence). See diagram below


In my opinion, using the hourly chart, Parabolic SAR (Stop and Reverse) is very good for pin-pointing a new trend pretty early. So it does offer an excellent buy and sell signal. If your mind is strong enough to just do what the chart is telling you with this indicator you will do just fine. Like I said, in part 3. My stop loss is usually placed just about 5 pips above the Parabolic SAR value at the close of the candle.

Parabolic SAR is an outstanding indicator. It works beautifully well in a trending marketing and can keep you long enough in a market to ride out the trend. However, the Parabolic SAR is very unreliable during a sideways trending market, just as the Moving Average. So most of the time, I stay out of a sideways market. If you can stay away from the market, what I suggest you do is drop down your time frame. In my case, since I am mostly trading from an hourly chart, I would drop the time frame to 5 minutes or 1 minute and the parabolic SAR would work just fine in a sideways market.

As you can see from the chart, the points are pretty clear. If you have taken a short position, the SAR pointts will be above the prices, and the signal to go long will be when prices cross the current SAR point from below. (See chart). Once you have entered a position long or short and your stop loss 5pips below or above SAR value, you will notice that the SAR points will be far enough away from price to even permit some counter trend movement without closing you out. Once the currency pair begins to really trend and move in your favor, SAR points will move with prices. When you notice a that price begins to tighten with the SAR points, then get ready to close your position. Sometimes the trend will continue, sometimes it will reverse and hit your stop loss.



What are the main uses of Parabolic SAR

SAR means Stop and Reverse

As you can see from the chart below:



The sell and buy signal were a perfect example of stop and reverse application. In this case. In both cases, you would have earned a nice profit just by obeying the rules. Close your sell position, when the parabolic SAR went below price and enter a buy trade. As I write, that particular buy trade on the chart moved from 1.4262 to 1.4816, before a reverse SAR signal was indicated. That is a whooping 554 pips in less than 4 days. Your only job would have been to check your charts and adjust your stop loss, until the parabolic SAR changed position in relation to price.


Using Parabolic SAR in conjunction with MACD also helps me to ignore false reversal signals in a trending market. Sometimes, a move will stall in such a way as to cause the SAR point to change position. For example if MACD is indicating a strong downtrend move, you would take only short trades and ignore all long signals. But if MACD is showing a strong uptrend, then, you can take only long trades. So in this case you are able to filter all false reversal signals.

Another use for me as mentioned before is to chose my stop loss. After my trade has been taken, I use the Parabolic SAR value to trail my position. Every hour, I adjust my stop loss, 5 pips below or above the parabolic value.

As you learn forex trading using technical indicators, please make sure you keep it simple. Don't crowd your charts with many indicators. As you can see, my chart is clean and clear. I have just 2 moving averages, the Parabolic SAR and MACD.

I hope this lesson on Parabolic SAR will help you achieve your dreams of becoming a master currency trader.

Learn Forex Trading Part 1-Basic Forex
Learn Forex Trading Part 2 - Technical
Analysis
Learn Forex Trading Part 3 - Technical Indicators