Trading Indicators such the parabolic SAR strategy indicator are a great way to better analyze market movements and supplement your trading methodology. One example, and which is relatively easy to use indicator, is this Parabolic SAR Strategy Indicator.

In this video, we will tackle how to effectively use this indicator order to maximize your trades.

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Parabolic SAR Strategy

Welcome to this video on how to use Parabolic SRA Strategy effectively. This is an indicator that a lot of people really like. Its concept is one of the most simple and easy to follow indicator. SAR stands for stop and reverse. Some people consider it a trend following indicator. So, what we’re looking for here is this – as long as these dots are above price, then we’re short. I’m going to simplify things here, maybe oversimplified. Then when the dots go below price levels, then we go long, a bullish signal. The other thing that’s kind of nice about this is that it creates a trend following indicator. The parabolic SAR strategy is to go short when dots are above it and long when dots are below the price.

Then, it also serves as a trailing stop. So, you just follow this along. As long as the price dots stay below the candlesticks, then stay long. Now see here, of course, nothing’s perfect and everything has its own little parameters. Whatever perfect parameters you think you’re going to come up with will never be perfect for every situation. So, here we get one that goes above and comes back down below within one bar. That would have stopped and reversed you out. That’s one of my issues with the indicator; I don’t like the term stop and reverse because it implies that trends that go up and go down – that’s not typically how trends actually go. So, to stop and reverse means that you stop out of your long trade and you go short the downtrend.

How to Use Parabolic SAR Effectively

But really what seems to happen most of the time in markets is, but more often, we get enough trend and then the market kind of goes sideways for a little while. So, reversal trades usually have a worse than 50 slash 50 win-loss ratio narrative. After this, we go sideways for a while and say, okay, well then I’m to go with short. Not necessarily, sometimes it’ll continue into an uptrend. So, I don’t like this whole concept of SAR stop and reverse and calling it that – sorry to the classic technical analysis fanatics. But that’s my personal opinion, feel free to disagree with me. It’s a free country, a free world. Well, the whole world’s not free, unfortunately. But anyway, you have my permission to disagree with me, type your comments in the comments below if you do, and I’m a big boy, I can deal with that.

Then let’s take this off of here and see what happens. You can see now that we run into some problems – let me just narrow this down a little bit, let’s change our scaling. So, we had the first example I showed you looked pretty good, right? So it kept us into that trend – let me go back there first a little bit and just show you that again. That would have worked out real nice. So, just like most trend trading techniques, they all look great; a lot of indicators will look fantastic as long as you’re on a trend, and those are the kinds of examples that they’ll put in their textbooks and their videos and all that kind of stuff. That’s beautiful except for one problem – the markets don’t trend most of the time. So, I don’t know what the exact steps are anymore.

Best Parabolic SAR Strategy

They vary. I’ve heard, well 30 percent, I think that’s aggressive. I’ve heard 20 percent. Lately, I’ve heard markets only trend about 15 percent. I do believe that the markets are trending less and less frequently. And, by the way, when this indicator was created, it was actually before the time of the computer age. So, let’s also be clear about that. When the computer age came in, then market started trading very differently; price patterns changed differently or started forming differently. So, if you trade methodologies based on techniques that were developed before modern computer technology entered the markets, you’ve got a big problem, it’s not going to work for you. Anyway, what would have happened here is what is typical.

So, I showed this one little dot here and then it goes back down – we are now supposed to be in an uptrend. And then the dots go back above price bars and we’re supposed to be in a downtrend. But the market didn’t really go down, did it? Then the price comes below the price bars, so now we’re supposed to go up – well it didn’t go up that much. And then the indicator goes above the bars. But the market actually ends up going up while the Parabolic Sar is above it. This is the problem. You get this kind of stuff happening when you’re in a non-trending market; by the way, the definition of trend is not direction. The definition of trend is not higher highs and higher lows.

Parabolic SAR Trading System

Anybody’s told you that those are wrong definitions and they will mess up your trading because a trend is defined by Webster’s dictionary as the extended direction of, well, anything. So, extended general direction means a long-term move. These are short-term moves in there for none of these are trends, and that’s why I personally and heretically do not consider the parabolic SAR to be a trend indicator. It does not indicate long-term moves as demonstrated here. And you will see this, you might say, well, that’s just one example – fine, pull up your own charts and you’re going to see plenty of examples like this. So, in my mind, it is not a trend indicator at all. Can it be a decent trailing stop at times in trail, in trending markets? Yes, it can be. Okay. I still don’t prefer it as a trailing stop. Why,

because, for example, it starts too far away from the market. So, here is our first signal on that bar right there; look how far away it is. Sure it tightens up. But my initial protective stop is too far away – I don’t want it to be that far away initially. Anyway, it can be used though. But the point is it can’t be used alone and in fact, no indicator, and I’m not trashing the parabolic SAR. No one indicator will make you money, not this one, not stochastics, not MACD, not RSI, and not CCI – no indicator makes you money. They’re indicators. And so what’s an indicator? Well, the answers and the question – they indicate! What they don’t do is make you money directly.

ADX Parabolic SAR Strategy

Otherwise, we would call them moneymakers. So, can it be helpful in your trading? And the answer is yes, it can be helpful as part of a complete trading methodology. As I’ve implied here, it can work pretty darn well in those we’ve actually seen it can work pretty good for a trailing stop, especially after the market starts moving a bit – I don’t like its initial protective stop and there’s the market starts moving a bit. Yes, it can be a pretty decent trailing stop but only in trending market and it does not define a trending market. Therefore, one of the things that we will have to add to it is a trend indicator of some sort. You can use whatever your favorite trend indicator. But, for today’s purposes, we’ll just use the ADX. All right, so let’s pull up the ADX.

So now, I’ve added a 14-period ADX to my charts here and in ninja trader they call DM; that actually adds DM plus and DM minus, and I just want to keep things very simple for you today. And I put it at a threshold of 20. So, this black horizontal line here is set at 20. Basically, when Adx gets above 20, then it’s considered a strong trend. Now we’re adding the two together. We’re not going to depend on Parabolic SAR for a trend, we will depend on ADX in the example, and here is the spot where it goes above. Now, you’ll notice that it doesn’t normally nail specific swing highs and swing lows, and once in a while it will but periodically or typically, it won’t. Most trend indicators are by definition lagging indicators and there’s a reason for that.

Parabolic SAR Indicator

The definition of a trend is the extended general direction of the market. Therefore, you can’t have a trend indicated until there’s enough data to establish that you’re in an extended general direction, and, therefore, it is lagging mathematically. But if you get into a trend like this, so then it is. So Parabolic SAR, there is the input that I’m using for that and for the ADX – you can see ADX here, and I’ve got the positive and negative blacked out. I don’t want to see those right now.

But it’s a period of 14, right? You can experiment with different periods, you can experiment with different threshold lines. I’ve got it at 20 – different people use different periods. What we do here is we say now we’ve got a trend established at this point and we will use this as our trailing stop; our Parabolic SAR as our trailing stop. Not going to use it as a stop and reverse necessarily. Now what you’ll also notice is that the ADX starts coming down here and that’s also a kind of a little signal that maybe we have put in a high, so this whole situation here where Parabolic SAR went above the bars, then below the bars then above bars real quick – we also see a confirmation of that here on the ADX where it’s a diverging in starting to come down.

Parabolic SAR Settings

So, it just comes down. Now, the one thing I don’t like about the ADX is that it doesn’t indicate a trend after you got to the top coming back down, you’ve got to wait for it to reset below the threshold line, in this case, 20. So, this does not indicate a downtrend just because it’s coming down and therefore you got to wait this period all this period to the indicators really not telling you anything other than maybe indicating that it’s good to get out of your long trade, but now you got to wait for it to reset before you get another trade signal.

A lot of time can go by, as you see this is a daily chart and you know, a couple of months go by. Then, by the way, just to show you what we showed before, all of this noise here that we looked, if we look at that noise and you say, wait a minute up, gave us a long signal here, short signal here, etc., that whole time ADX was, first of all, declining back down to the zero line and then it stayed below the zero line indicating that there is no trend.

Rubber Band Trade Strategy

Therefore, we don’t want to use the parabolic SAR in that situation. So, this is where you combine different types of indicators for different purposes in order to develop a successful trading methodology. So if you liked this video, if you found it helpful, please understand, it’s free. But, if you got some value from it, you actually have a moral obligation to pay it forward and click the beautiful share button below. In fact, sharing the video is really the best way that you can pay me back for giving you all the free tutorials that I’ve given you, now over a hundred free tutorials. Also, if you’re watching this on youtube, go ahead and click the thumbs up icon.

That’s really easy and I love your comments, so please leave your comment because that actually encourages me to create more free tutorials for you. I’m going to give you also one of my favorite trade strategies called the rubber band trade, which has a very high wind loss ratio. It’s a simple trade. I’ll teach it to you in about 26 short minutes on a video that I have for you also absolutely free.

So, get my rubber band trade strategy for free by clicking on the image in the top right corner of this video or in the description below the video. If you’re not watching on youtube, then there’s probably a link below or on the Optin form on the side, whichever one of those ways you choose to request the video, I will personally email the video to you with the rubber band trade strategy.

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BTW, if you’re interested in the indicator that I use personally for very precise entries and exits. I’m happy to share that with you. Just send me an email at [email protected], and I’ll show you how to get access to that indicator.

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