Day Trading & Forex Forum

Let us take the following example to get a better idea of the characteristics –

Let us examine the different situations of the SAR as described above.

We look at the initial long position, which we have marked on the chart. We can see that the SAR flips below the price, when the uptrend starts.

Similarly for the downtrend, we notice how it flips above the price, and can be taken as a stop level.

Combining the two indicators to form an effective technique.

In this case, we use the particular characteristics of the PSAR, that it works extremely well in markets with a dominant trend and that it accelerates steadily as the prices trend.
The stronger the trend the closer the Parabolic gets to the prices, which is exactly what we are looking for.

So when the parabolic indicator is close to the prices and we have our ADX "turning-point" setup formed, we have all the ingredients for an excellent trade.

Even a very small countertrend move will now quickly cross the Parabolic and signal an aggressive entry.

These entries will usually occur before the ADX starts declining.

Hence this becomes a very reliable pattern that is designed to identify a major reversal in direction.

Another advantage of using the PSAR is that we can use it to define our exits. We should exit our trade when the PSAR flips to the opposite side.

One can apply different money management principles for the exit of a trade, but the basic concept to remember is that a change is indicated when the PSAR flips to the other side of price.

The following chart example shows two examples of a change of trend towards the short and the long side.

The entry, stop and the exits of the trades have been marked as per the rules of our technique.