The Secret Mindset
This video discusses how to use the parabolic SAR indicator to correctly trade and find entry and exit points in Forex and the stock market. It is best used in trending markets and offers decent exit points. The Ichimoku cloud can also be used for support and resistance. It is important to find a balance for the values of the step and maximum step in the SAR for quality signals. The video provides a setup for both long and short positions with the SAR and Ichimoku cloud. Profitable trades and losing trades are expected.
Parabolic SAR: How to Use it in your trading strategy
Introduction: The Importance of Identifying Trend Changes
As a trader, identifying new trends is important, but just as important is being able to spot when a trend is ending and getting out at the right time. This requires careful observation of price action and looking for clues that may predict a trend change. In this article, we will be talking about the Parabolic SAR indicator, its uses and limitations, and how you can incorporate it into your trading strategy.
What is the Parabolic SAR?
The Parabolic SAR is an indicator displayed as a series of dots, mainly used to identify market direction and the beginning of reversals. It allows traders to evaluate trend direction, pinpoint entry and exit points, and place trailing stops. The dots of this indicator shift from being below the candles during an uptrend to above the candles when the trend reverses into a downtrend.
Using the Parabolic SAR to Identify Out Points
When the price is trading below the Parabolic SAR, it can be interpreted as a signal to sell or remain short. Conversely, if the price is trading above the Parabolic SAR, it can be interpreted as a signal to buy or remain long. During strong trends, the gap between the price and the dots widens, but if the market is flat or choppy, the dots and price interact with each other frequently.
Calculating the Parabolic SAR
The Parabolic SAR’s calculation is rather complex and not necessary to cover in full detail. What traders need to know is that the SAR comes with two values that can be adjusted: step and maximum step. The default value for step and maximum step is 0.02 and 0.2 respectively. When the price makes a new high or low, the acceleration factor increases by 0.02. This explains why the gaps between the Parabolic SAR and the price increase during strong trends. By increasing or lowering these values, traders can adjust the sensitivity of the indicator.
How to Trade with the Parabolic SAR
The Parabolic SAR provides distinct signals that the market trend is about to change. A dot appears below the price during an upward trend, and a dot is placed above the price during a downward trend. The Parabolic SAR trails the price until the trend has finished and begins to reverse.
Traders should close their positions when the price moves below the SAR if they hold buy positions and close sell positions when the price moves above the SAR. This indicator should be used as an exit indicator. Traders should not use the Parabolic SAR in markets that are choppy or have a sideways price movement.
Using Ichimoku Cloud with the Parabolic SAR
To find a balance between lagging and providing quality signals, the Ichimoku Cloud can be added to the setup. The advantage of using Ichimoku is the fact that it offers a unique perspective of support and resistance, with the most important role being the Kumo Cloud. The Parabolic SAR can be used for entries and exits, while Ichimoku Cloud can provide dynamic areas of support and resistance.
The Setup for Long and Short Opportunities
For long opportunities, the price needs to be above the Kumo Cloud with a dot formed below the price. For short opportunities, the price needs to be below the Kumo Cloud with a dot formed above the price. Traders should never take trades inside the cloud.
Example of Trading with Parabolic SAR and Ichimoku Cloud
Using the EUR/JPY 4-hour chart as an example, we can see that during a downtrend, short opportunities were present when the price was below the cloud and a dot appeared above the price. The Parabolic SAR was well separated from the price, indicating a strong trend. During this time frame, traders recorded five or six profitable trades, but traders should not expect to win every time.
Conclusion: Parabolic SAR as an Exit Indicator
In conclusion, the Parabolic SAR indicator is an excellent tool for identifying trend changes, but it is best used as an exit indicator. Incorporating the Ichimoku Cloud into the setup can increase the tool’s accuracy. However, traders should never take trades inside the cloud, and it is best used in markets that are trending and have long rallies and small corrections. By finding a balance between sensitivity and accuracy, traders can generate quality signals to help them get out of trades at the right time.
