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Independent Study Parabolic SAR
Independent Study Parabolic SAR
| Parabolic SAR |
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The Parabolic SAR is another indicator bought to us by the illustrious Well Winder. Introduced by him in his book “New Concepts in Technical Trading Systems”, the concept was originally called the “Parabolic System”. This name comes from the formation of the indicator as it plotted. With advancing price action the indicator forms a parabolic curve.  The “SAR” stands for Stop and Reverse. In this system, the trader is expected to be in the market almost full time, managing his stops and entries at predefined times when price touch the indicator and the first position is stopped and another position is entered in the reverse direction. The PSAR is applied with the understanding that taking every single trade without exception would deplete your account and account for many losses with a few big profits that would inevitably lead to a zero balance in your account. Since that is not your goal, you must filter the signals for best results. In the following chart, I have applied a simple SAR strategy that takes a true stop and reverse every time the currency pair crosses the indicator.  So how can you trade the PSAR given its inherent draw back? One simple idea is to filter the trades using another indicator or the indicator itself. On such idea is to not trade until there are 5 points in a row, and requiring that the high of the current candle is higher than the high of the last sell candle, and vice versa. In the following chart I have applied this idea, and the results are very different.**  One of my favorite ways to use the PSAR is to couple it with Schaff Trend Cycle (STC) The STC is a combination of moving averages, MACD and Fast Stochastic studies. I like this because it really strips out the whipsaws that can ruin your account. The following is an example of what to look for. 1. 5 points in direction of trade. 2. STC firmly against top or bottom signaling trend. In the following example I identified three lines. Line A would not be a long trade because the STC never topped out. Line C would not be a short position because the STC never bottomed out. However line C would initiate a trade because the STC bottomed out. 
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