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Simple Trading Strategies: To Find Reversal Points To Show Us The Trend

This document discusses a simple forex trading strategy that uses the 100 period exponential moving average and Parabolic SAR indicator. The strategy aims to trade in the direction of the longer term trend identified by the 100 EMA, only taking signals from the Parabolic SAR that align with this overall trend. The Parabolic SAR provides buy and sell signals but trades will only be entered if the signal is in the direction of the 100 EMA trend. The rules are kept simple - only trade in the direction of the 100 EMA trend, enter on Parabolic SAR signals beneath/above the candlesticks, place stops below recent lows/above recent highs. This helps filter out whipsaw signals and keep

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Mo Alam
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286 views

Simple Trading Strategies: To Find Reversal Points To Show Us The Trend

This document discusses a simple forex trading strategy that uses the 100 period exponential moving average and Parabolic SAR indicator. The strategy aims to trade in the direction of the longer term trend identified by the 100 EMA, only taking signals from the Parabolic SAR that align with this overall trend. The Parabolic SAR provides buy and sell signals but trades will only be entered if the signal is in the direction of the 100 EMA trend. The rules are kept simple - only trade in the direction of the 100 EMA trend, enter on Parabolic SAR signals beneath/above the candlesticks, place stops below recent lows/above recent highs. This helps filter out whipsaw signals and keep

Uploaded by

Mo Alam
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
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Simple Trading Strategies

Moving Average With Parabolic SAR Forex Trading

Strategy
Trading the trend in any market is a great trading strategy
and using the Parabolic SAR to find reversal points in the direction
of the Forex trend makes it even better.
We are going to use the 100 period exponential moving average to
show us the trend.
This is a longer period moving average than most people are used
to considering the 20 period moving average is the most popular.
For day traders, you could swap out the 100 EMA for the 20
period moving average or even the 10 period MA.

Why Use The Parabolic SAR In A Trading Strategy


J. Welles Wilder invented this trading indicator and the Parabolic
SAR stands for “stop and reverse”.  In an uptrend, dots form
under the price until price reaches a certain point when it flips to
the top of price giving you a sell signal.
This is where the Parabolic SAR gets the “stop and reverse
indicator” name from.  Seeing as Parabolic SAR is a trend
following indicator, the “flip” from bottom to top would indicated
that longs should close their trading position and then sell the
market they are trading.
For Forex traders, that simply means that the quote currency, the
second currency in a Forex pair, has gained some strength.

Parabolic SAR Buy Signals – Sell Signals


Any trading strategy that uses the Parabolic SAR has a built
in trailing stop function.  As price declines for example, the dots
will decline as well and seeing as “stop and reverse” is the main
feature, you can use the dots as a stop out location.
As with any trading indicator you are using for a strategy, you can
make Parabolic SAR move sensitive by adjusting the increment
setting.  I use the default parameters as over optimizing a trading
indicator to make past data look better, is a rookie mistake.
We are going to use the Parabolic SAR to give us both buy signals
and sell signals but we will not stop and reverse our trading
position.

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Using The Moving Average With Parabolic SAR


Using the 100 period exponential moving average will gives us the
opportunity to stay inside of the major trend direction while taking
only the signals that fall in line with the current trend.
If you were to take every flip of the Parabolic SAR as a trading
signal, you could find yourself entering and exiting positions
quickly for a loss in a whipsaw market condition.  Any trend
following indicator is prone to fail in a market that is not
trending.  Since markets only trend about 35% of the time, you
can see a filter will help you stay out of low probability trading
conditions.

100 EMA For Trend Direction


Using the 100 moving average will help keep us in line with the
larger trend and prevent over trading.  Taking a look at the red
box, you can see price action is showing consolidation and the
Parabolic SAR is flipping back and forth giving buy and sell
signals.
It would have been tough trading just taking the buy signals (look
closely as some were profitable) even though there was a
probability of a larger up move due to the overall trend direction. 
Taking sell signals as well would have chopped your Forex trading
account to pieces.

Parabolic SAR Trading System Rules


Every trading strategy needs rules and the number one rule we
will have for the Parabolic SAR strategy that we will use for swing
trading is:
trade only in the direction of the 100 EMA.
Our rules beyond that are quite simple.  Complex trading rules
can lead to you not following the trading plan you have written
which leads to a failed trading business.  All successful
traders follow a written trading plan and I suggest you do as well.
Buy Signals (just reverse for sell signals)
 We need price to trade above the 100 period moving
average.  If price is whipping around the EMA, we will choose
another market
 The Parabolic SAR must print a dot beneath a candlestick
and that will be our buy signal
 Place a buy stop order so momentum on the break of the
setup candlestick high will take you into the market
 Use a few pips below the printed dot for your initial stop loss
location

Parabolic SAR Trading Setups


Let’s break this chart down to see how the Parabolic SAR signals
worked out in relation to the uptrend given by the 100 EMA.
1. Notice price is whipping around and close to the 100 EMA. 
The two blue lines are the support and resistance levels of a
range that has formed due to consolidating price action.  We
need to wait until price moves from the moving average before
considering any Parabolic SAR trading signals.
2. Large momentum move and price action and price structure
traders can see price is actually sitting on the former resistance
level of the range.  The white line is the buy signals with the
small arrow indicating where you’d place a pending order.
3. This is where the stop and reverse nature of the Parabolic
SAR comes in.  We would exit our long position and not take
the sell signal due to the trend.
4. Buy signal occurs when the blue dots appear below
the candlestick.  We don’t get triggered in the trade due to
placing a pending order a few pips from the high of the setup
candlestick.
5. A sell signal is given which cancels the long setup.
6. Another buy signal is given and price takes off to the upside

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Stop Loss Location


The white arrows are showing where the stop loss would be on
these trades when triggered.  You can see that it is a fairly large
stop which would require a smaller position size.

The trades did not trigger at the setup candlestick and as the blue
dots climbed upwards while the trade order was still pending, you
could alter your stop loss to be in line with the new plotted dots.
Traders who understand price action including pullbacks and
breakouts, could use the dots as a potential trading setup.
 

Alternative Parabolic SAR Trading Strategy


Let’s look at the same chart but with a different trading
persepctive

Alternate Trading Strategy


Using a more price action approach, is there a way we can
combine the moving average trend direction with the Parabolic
SAR buy and sell signals?  Yes.

Let’s use the signals to alert us to a potential trading pattern.


1. The buy signal brings us to the chart where we see
momentum move and price consolidating at highs.  I talk
about this type of setup in my weekly Forex setup updates.  We
can play the breakout and use the corresponding blue dot for
our stop.  We can also use the candlestick shown by the green
arrow.  This is a failure test of lows where we can buy inside
the range at the high of that candlesticks
2. This sell signal alerts us to watch for a price action pattern. 
Here we get a pullback in price and without a blue dot
switching to the bottom, we are not brought into a long trade
when price has the little rally in the middle of the pullback
3. Price breaks out of the trend line with a corresponding buy
signal but does not go much further.  Price pulls back and the
sell signal cancels any trading play
4. Price action shows a retest of the broken trend line (which
we see happen a lot!) and then a break of the down trend line
with a corresponding buy signal

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Trending Market

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