Parabolic SAR Trading Strategy

The Parabolic Stop and Reverse (SAR) is a technical analysis indicator developed by J. Welles Wilder Jr. in the 1970s. Parabolic SAR Forex trading strategy — is a rather risky system that is based on direct signals of the Parabolic SAR indicator, which shows stop and reverse levels.

Mechanism 

The Parabolic SAR is represented as a series of dots placed above or below the asset's price chart, depending on the prevailing market trend. When the price is in an upward trend, the dots appear below the price; conversely, in a downward trend, the dots appear above the price. The indicator uses a fixed percent of the asset's price movement, termed the "acceleration factor," which increases as the trend progresses.

Advantages

1. Simple to follow.
2. Only one standard indicator used.
3. Entry and exit conditions are given directly by the indicator.

Disadvantage

1. Indicator lag.
2. Somewhat risky and not always effective.

Strategy Set-Up

1. Any currency pair and timeframe should work.
2. Add a Parabolic SAR indicator to the chart, set its Step to 0.05 and Maximum to 0.2.

Entry Conditions

Enter Long position when the current price touches the indicator from below and it changes its direction.

Exit Conditions

1. Set stop-loss directly at the indicator's latest level — above the price for Short positions and below the price for Long positions. Adjust stop-loss with each new bar.
2. Take-profit should be set to the same value as stop-loss, but you should not adjust it. For example, if your Short trade entry level is 1.1030, and stop-loss is set to 1.1050 (20 pips), your take-profit level should be set to 1.1010 (same 20 pips).

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.

Warning!

Use this strategy at your own risk. EarnForex.com cannot be responsible for any losses associated with using any strategy presented on the site. It is not recommended to use this strategy on the real account without testing it on demo first.