Parabolic SAR Strategy For Forex Trading

This Parabolic SAR strategy for Forex features the trading indicator invented by J. Welles. Wilder.  This is a basic trading strategy that centers around the SAR – stop and reverse – idea behind it.

As with any trading indicator used in a trading strategy, they all lag price.  Most trading strategies could be improved by utilizing price action along with a trading indicator such as the Parabolic SAR.

Using Parabolic SAR in Forex trading is really no different than using it with any other market.  The basic idea is:

  • If the Parabolic SAR goes from below the candlesticks to above, we have transformed into a down trending market
  • If the indicator goes from above to below the candlesticks, we now have an uptrend

The dots that form with the Parabolic SAR will also trail each candlestick regardless of the trend direction which can really improve your trade management.

You can see from this chart, using the “stop and reverse” feature of the Parabolic SAR looks quite simple.  Another feature you may notice is that when the market is slowing in momentum, the dots that are printed on the chart get closer together.

You can also see that in consolidations, the dots get closer to the candlesticks.  Some Forex traders may use the visual aspect of strong and weak momentum as part of their trading strategy.

 

Parabolic SAR Indicator Settings

I’m always a fan of using out of the box (default) settings of trading indicators and the Parabolic SAR is no exception.  The default acceleration factor is set at .02 and that may be a number you wish to change.

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The acceleration setting is simply what determines the dot separation.  Some people may trade volatile markets and begin to optimize that input value of the Parabolic SAR.  That is a rabbit hole as many people will over optimize the past data to give better strategy results that rarely play out in the future.

There is no best setting for the Parabolic SAR or any other trading indicator.  Use the default values and build your trading rules around those.  Price action, as mentioned earlier, will help increase the outcome of most trading strategies.

 

Day Trading or Swing Trading The Parabolic SAR – Sell Signals.  Buy Signals.

Trading rules will dictate your chance of success with any trading strategy.  For the Parabolic SAR trading strategy, it is no different.  You need rules to determine a sell signal and a buy signal.  On top of that, you must have proper risk protocols in place to protect the downside.

This image highlights the trading opportunities on this chart.

  • When the Parabolic SAR dots flip to the topside of the candlesticks, you have a trading signal to the downside as shown by the red arrows
  • Parabolic SAR dots below candlesticks equals a buy signal after the dots move from the top

To make it even easier to understand, consider the dots much like people consider a moving average – dynamic support and resistance.  As long as the dots stay on top of the candlesticks the resistance level is holding.  Support is holding when the dots are under the candlesticks.

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Buy Signals – Once the dots flip to underneath the candlesticks, we are in an uptrend.  You can place an order to go long over the highs of the first candlestick that has the dot under it.

Sell Signals – Once the upside flip occurs, place your order below the low of the candlestick that has the Parabolic SAR dot under it

Stop Loss – You can place your stop loss either beyond the first dot or under the setup candlestick.  Always remember that a close stop loss order can be hit even if the trend is still intact.  My favorite stop loss technique uses the Average True Range indicator to keep my stop out of the noise.

Whether you swing trade or day trading the Parabolic SAR strategy, the rules are the same.

 

Improve the Parabolic SAR Strategy – Using Trend lines

I am not a fan of using an indicator for all trading decisions.  Technical analysis is a big help and will help you avoid being whipped back and forth.  I’ve written about a Parabolic SAR/100 EMA trading strategy but let’s stick to simply price and the trend lines we use.

Whenever we have a trend line under price, we are looking at an uptrend.  We will only take Parabolic SAR trades that flip from the dots on top of price to the downside.  We can use the opposite flips for trade exit or as an opportunity to manage the trade.

You will have times when you can have price consolidations and in those times, you will want to wait for a breakout from consolidation before taking any trades.

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Stop loss placement will be the same as the regular Parabolic SAR strategy.

Wrap Up

The Parabolic SAR strategy is a simple and straightforward way to trade.  It isn’t easy of course as you will take losses and those may discourage many traders.

For those that can keep their emotions in check and have tested the strategy and know what to expect, the losses will just be a part of doing business.

If you liked this Parabolic SAR trading strategy, the basic one of the one with trend lines, please share this with your friends.

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