I’ve been lucky enough to test this one out myself and it’s truly a work of art. You need to grab this one fast before it’s taken offline so download your copy here:

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Elliot Wave theory is one of the most reliable and studied ways to accurately predict price moves in the market and enter into good trades. Best part is that it’s on the house, so get your copy here:

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This is a powerful and sometimes complicated concept but this unique application will instantly show you where the market is going.

• No restrictions and fully functioning.
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• Installs automatically.
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No matter which one of the waves the price is currently on, you just drag and drop the points to the corresponding wave and the rest of the Elliot waves are plotted out for you.

What this tool does is simplify the process of applying the waves on your charts and helps you see where the price may potentially go at a glance. This is by far, the best new trading tool released this year. Make sure you check it out before it’s gone for good.

P.S. Don’t forget to leave a comment to throw your name in the hat for a gratis copy of Cristina’s Scientific Forex: Click Here To Download Elliott Wave Prophet

To add more fuel to the fire, she has gone ahead and released an interview which should give you plenty of insight into her trading approach.

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It will let you look inside the mind of a $500 per hour trading genius.

It’s an old addage that goes, playing with people better than you will make you better at whatever you do. Compete with someone better than you for a few weeks at a particular sport or activity and your own game will improve dramatically.

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This is a great way to learn some of the techniques successful traders use so pay attention to this one.

Happy Trading

P.S. Read the full interview here: http://www.scientificforex.com/genius.php

P.P.S. In case you missed yesterday’s report (and the Forex Bob video), you can still get it here: http://www.scientificforex.com/declassified.php

P.P.P.S. I got a sneak preview of an amazing trading tool Cristina will be releasing soon. So watch this space, you are going to want that one!

The animated story of a little guy called Bob, who wants to become a Forex trader. I think if you watch this quick video about Bob and Cristina’s journey in Forex, you might just recognize a few home truths. – http://www.ScientificForex.com

I’m looking for either a sell at a close below R1 and a break of the trend line or a buy at a close above R2 at 15885.

There are several news releases due out today for the USD that are high impact in nature.

1.8:30am EST – Non-Farm Employment Change
2.8:30am EST – Unemployment Change
3.8:30 am EST – Average Hourly Earnings – Medium Impact
4.10:00am EST – ISM Non-Manufacturing PMI
5.10:00 am EST – Factory Orders – Medium Impact

Stay safe today!

CLICK HERE to read the full article.

*****

The Dollar has hit a three-month low versus the Yen today, having come under renewed pressure following the U.S. Federal Reserve decision last week, that it was likely to keep interest rates near zero, at least until late 2014.

The greenback fell to 76.11 Yen, its lowest level since October 31st 2011. In October, the Dollar had hit a post-World War II record low of 75.311 Yen. At that time, this had prompted massive Yen-selling intervention by Japanese authorities.

According to some analysts, Japan may then act with large scale intervention, if the Yen approaches a new record against the Dollar during Asian trading hours.

In fact, the Yen rose against all of its major peers, which has prompted the Japanese Finance Minister, Jun Azumi, to reiterate his stance that he will take “bold” steps to curb the currency’s strength, if necessary. Others are of the opinion though, that the lack of volatility means that there isn’t any urgency for Japan to intervene just yet.

As for the troubled Euro, it fell for a third day against the Dollar while Greece continues to struggle to conclude debt-swap talks with creditors by the end of the week.

The 17-nation currency had slid to a one-week low against the Yen. This as Portugal will sell 105-day and 168-day bills today, amidst concerns that it will follow Greece by needing more aid to avoid a default. Standard & Poor’s has increased the number of Portuguese banks on a “negative” watch after it cut the sovereign rating of the country.

Portugal has a far lighter calendar than Athens with just one payment due this year. Analysts predict though, that it’s a sell on rallies market for the Euro, as concerns linger that Greek talks may continue to drag on.

The Greek Prime Minister, Lucas Papademos, said on Tuesday that he wants to bring the negotiations on a debt-swap agreement with his country’s creditors “to a successful conclusion by the end of the week.” He went on to say that he would try to meet German-led demands for a bigger debt write-down by investors and deeper budget cuts by his government.

The Euro fell 0.3 percent from Tuesday to $1.3039 as of 7:25 a.m. in London, after touching $1.3026, the lowest since January 25th. It slipped 0.5 percent to 99.31 Yen, after sliding to 99.29 Yen, the weakest since January 23rd.

All the best!

*****

EXOTIC TRADING

Yen Extends Gains

The Euro suffered further losses in early Asian session trading on Wednesday. Overnight selling wiped out any gains while investors kept an ear to the ground for news of another Japanese intervention.

The Yen’s strength is in part due to the the Federal Reserve’s pledge last week that it would keep interest rates near zero at least until late 2014.

The Euro zone debt crisis has not been forgotten and Greece edges closer to clinching a debt deal.

==================
News Watch For EURJPY
==================

There are no High Impact News Releases Scheduled for the Euro or Yen currency pairs today but traders will be monitoring CPI Estimates data due today, the debt situation with Greece and a possible Yentervention.

============
EURJPY Analysis
============

As you can see on the chart image below, price has bounced off the upper bearish channel trendline and continued on its way down.

Click on Image to Enlarge

Price surged beyond the 100.000 level signalling a sell trade was on the cards but at that time I had Bullish Divergence present on my charts so I opted to wait for the pullback to the upper channel trendline instead.

Price continued on its way down though and Bullish Divergence is no longer present so, over the short term we can look for a move back towards the upper channel trendline.

The overall trend remains bearish but the key area to watch will be around the 100.000 level where we could see either a bounce or breakout which could present us with an opportunity to enter.

Happy trading!

*****

Yesterday we went long on the GBP/USD. We were targeting the Weekly R2 of 1.5885 but haven’t made it there yet. Because of the news yesterday I decided to close the trade for a profit of 48 pips and wait for another opportunity. That came this morning as price tried to break the lower channel line but could not and is now bouncing off to the up side.

However the problem today is that the USD has a two major news releases this morning. The first at 8:15am EST which is the ADP Non-Farm Employment Change and the second at 10:00am EST which is ISM Manufacturing PMI. Both of these are high impact so no trading until after these are settled.

We’ve struggled to get past 1.5800 so if we can get a close past that today I’ll be looking for another long position.

Click on Image to Enlarge

Good luck!!

*****

Click on Image to Enlarge

Wednesday 1st Feb 12

EUR/USD 4 hour chart

1st Resistance – 1.3233

2nd Resistance – 1.3302

1st Support – 1.3032

2nd Support – 1.2929

Monthly Pivot – 1.2981

Weekly Pivot – 1.3111

Strategy – As this might be a short term top, target short position.

Tactics – Taking light short positions below 1.3075.

Short at 1.3065, with stop at 1.3241 and take profit at 1.2929.

The Eur is strengthening as I write this and we are once again back above the monthly and weekly pivot points. This indicated that we might be in for some sideways movement.

I will keep position as is for the time being and see what develops.

Also, Wesley, Josh and Mark provide their take on where the markets were at today… read on to learn more.

Earlier today, the Euro rose on the heels of Greek Prime Minister, Lucas Papademos, having raised hopes that a potentially disastrous debt default would be avoided, with the likelihood of a debt swap deal being made this week between the Greek government and private bond holders. However, concerns over Portugal’s refinancing ability resulted in capped gains.

On Monday, the European leaders agreed on a permanent Euro zone rescue fund. Most also endorsed stricter budget discipline, but they fell short of reconciling fiscal austerity with growth.

The European Union leaders agreed to accelerate the setup of a full-time 500 billion-Euro ($659 billion) rescue fund. They also endorsed a German-inspired deficit-control treaty.

They left a Brussels summit late Monday, with no accord over how to plug Greece’s widening budget hole. German Chancellor, Angela Merkel, also voiced her frustration with the Athens government’s failure to carry out an economic makeover.

As a result, the Euro rose 0.4 percent to $1.3186 and remained below a 6 week high of $1.3235.

The outlook for Euro, in the opinion of many analysts, remains on the downside. Should Greece secure its deal with private bondholders and meet its 14.5 billion Euro payment on the 20th of March, the IMF would still have to consider the fiscal and growth objectives of the austerity efforts in Greece and Italy. The liquidity difficulties of Portugal’s sovereign bonds also pose a major challenge.

In fact, Portugal’s 10-year government bond yield topped 17 percent on Monday. This is the highest since the Euro was launched. This has reignited serious concerns that Lisbon may become the next Athens and indeed require a second bailout to avoid going bankrupt.

In other news, traders were on watch for intervention by the Bank of Japan to prevent further gains in the Yen.

The Dollar slumped to a three-month low against the Yen of 76.18. Its record low around 75.31 was reached on the 31st of October last year.

Japan’s Finance Minister, Jun Azumi, said his ministry is prepared to take “decisive” measures. They intend to curb the Yen’s appreciation as it approaches a post-World War II high.

All the best!

EXOTIC TRADING

Yen Strengthens, Euro Under Pressure

The Euro dipped against the Yen and the Dollar touched a 3 month low. However, during the Asian session we saw the Euro rise, supported by hopes for a Greek debt restructuring deal that would help the country avoid a disorderly default.

There is a lot of talk about another Japanese ‘Yentervention’ especially as the Yen reaches record levels against both the Dollar and Euro.

==================
News Watch For EURJPY
==================

There are no High Impact News Releases Scheduled for the Euro or Yen currency pairs today but traders will be monitoring the German Unemployment Change and Unemployment Rate data due later today.

=============
EURJPY Analysis
=============

Price fell as expected to the 100.300 level and found support at the lower bearish trendline channel. Since then, price has bounce off this trendline and gone on to make it’s way all the way up to the upper channel trendline. Take a look at the following image:

At this point we could see the market go in either direction. Patience is the key here!

We need to wait for a clearly defined movement in a specific direction before we decide to enter a position.

If price goes up and breaks out of the upper channel trendline, I’ll be looking to the 101.000 level to offer resistance. Should price break out of this level too I’ll be looking to go long.

On the other hand, we may see price dip further down and if there is a breakout below the 100.000 level I’ll be looking to enter to the short side.

It may take a while before we see any significant movement in either direction, but I’ll keeping an eye out for an entry signal throughout the day.

Happy trading!

Hi everybody!

We were able to get in on a buy trade last night on the Cable at 6:00pm EST. We entered at 1.57045 and at the present we are in profit for 74 pips. We’ve moved the stop to break even and are nearing the weekly R1 at 1.5806. I would like to see it head up to R2 at 1.5885.

We have 4 upcoming news releases out for the USD this morning:

1.Employment Cost Index at 8:30am. – Medium Impact.
2.S&P/CS Composite-20 HPI at 9:00am. – Medium Impact.
3.Chicago PMI at 9:45am. – Medium Impact.
4.CB Consumer Confidence at 10:00am. – High Impact.

So far these are all medium impact news events, however, the last one is a high impact news at 10:00am so be very careful around this time.

Have a great week!

Tuesday 31st Jan 12

1st Resistance – 1.3233

2nd Resistance – 1.3302

1st Support – 1.3075

2nd Support – 1.2929

Monthly Pivot – 1.3087

Weekly Pivot – 1.3111

Strategy – As this might be a short term top, target short position.

Tactics – Taking light short positions below 1.3075.

Sell order is still open at 1.3065, 10 pips below support at 1.3075. Stop is set above resistance (1.3233) at 1.3241 and take profit at 1.2929.

As we are above the monthly and weekly pivot the direction has changed to up. There is upward moment but I will keep my short order for the time being. If we have a 4 hour close above resistance at 1.3233 I will close short order and wait for a pull back to get long.

Just the other day she cashed in on an $18k trade from one of the trade signals she shared with all her friends on Facebook.

Cristina posted a video on YouTube showing exactly how this trade played out. You can watch the video here:

Cristina’s more than happy to share her signals with other traders on Facebook, YouTube and Twitter. So make sure you visit the following links to connect with the trader that won the largest independent Forex trading competition in the World.

http://www.facebook.com/ScientificForex
http://www.youtube.com/ScientificForex
http://twitter.com/ScientificForex

Cristina’s also happy to answer any questions that traders may have and she recently hosted a private webinar with a closed group of traders so well worth checking this out.

Good trading

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Information, charts or examples contained in this
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Introduction

The Parabolic SAR is a trend-following technical indicator that was originally a trading system called Parabolic Time/Price System developed by J. Welles Wilder, Jr. who introduced it along with other systems and indicators in 1978 in his book, “New Concepts in Technical Trading Systems”. 

The Parabolic SAR has been around for decades but is still being used in conjunction with other indicators as part of trading systems, primarily to identify the direction of a security’s momentum and serve as a trailing stop. The indicator functions relative to price and time. Once a trade is entered, it leaves enough space for the price to take its normal course as the indicator moves slowly to the direction of the trade after every candle when a new extreme point is reached then accelerates until it reaches the maximum acceleration that is allowed. 

Definition of Terms & Related Concepts

Before we delve deeper on our discussion about the Parabolic SAR, let’s first define the terms that we will be using often to avoid any confusion. 

In the Parabolic SAR, the term “Parabolic” is used because when applied on the chart, the indicator forms strings of dots that are shaped like a parabola. On the other hand, “SAR” simply means “Stop and Reverse”, which is characteristic of the indicator. When reached by price, it stops the current pattern and reverses to the other direction. 

The series of red dots in the image above is how the indicator looks like. With that, the Parabolic SAR identifies entry and exit points based on a trailing stop that reverses when crossed by the price. It was designed by Wilder as a true reversal system, wherein every stop point is also a reverse point. That is why every stop point is called a Stop and Reverse (SAR) point. Have a look at the next image. 

As you can see, every time the price reaches the SAR, it reverses to the opposite direction signifying an entry signal opposite to the previous trade. 

When we talk about this indicator, we will be referring to high and low points often. For clarity, a high of a candle is said to be a High Point (HIP) if it is higher than the highs immediately beside that particular candle. On the other hand, a Low Point (LOP) is the low of a candle which is lower than the lows of the candles next to it. Have a look at the next image for some examples. 

A Significant Point (SIP) is the highest price during a Long trade or the lowest price during a Short trade. In the image below, you can find the Low SIP (LO SIP) in the Short trade and the High SIP (HI SIP) in the Long trade. 

Another important term we need to understand is the Acceleration Factor (AF). According to Wilder, it is one of a progression of numbers beginning at 0.02 and ending at 0.20. This means that at the beginning of every trade, the Parabolic SAR moves in increments in an increasing rate. Each step increment, represented by a dot, is dependent on the AF which is increased by 0.02 every time a new HIP (buy trade) or a new LOP (sell trade) is reached. The AF stops accelerating only when the maximum level of 0.20 is reached. 

The step increment of 0.02 and the maximum level of 0.20 are the default levels and can be adjusted in the indicator’s parameters. If you decrease the step increment, it takes a longer time for the price to reach the Parabolic SAR so there are lesser reversals. On the contrary, if you increase the step increment, the price reaches the Parabolic SAR quicker with more reversals, and could cause whipsaws. Take, for example, the GBPUSD 15 minute charts below: 

Similarly, decreasing the maximum step setting will cause lesser reversals while increasing it will cause more reversals. Have a look at the image below. 

Calculation/Formula

Because of advancements in chart trading, we no longer need to compute for the value of the Parabolic SAR for every candle and plot it on a piece of paper. However, it is still important to know how to compute for the value of the indicator in order to have a better understanding of how it works. Here are the steps in calculating for the value of the Parabolic SAR: 

Step 1: Get the Parabolic SAR value for Candle 1 

When using the indicator, the entry is always at the stop of the previous trade (or the previous series of dots). The first Parabolic SAR value is based on the Significant Point (SIP) of the previous trade. For a Long trade, it will be based on the Low SIP (LO SIP) from the previous trade, and for a Short trade, it will be based on the High SIP (HI SIP) of the previous trade. 

Example: 

Given that the previous trade was a Short trade and the LO SIP then is 1.62526, the current trade is a Buy trade with the first Parabolic SAR value of 1.62526. 

As soon as the current Buy trade closes, a new Sell trade opens. The HI SIP of the current Buy trade is 1.62908, and this will be the value of the first SAR of the new Sell trade. 

Have a look at the table below to see the values of every candle in the chart. 

Step 2: Compute the Parabolic SAR value for the rest of the candles. 

Calculating the Parabolic SAR value for the rest of the candles is more complicated than the first SAR. Here, you must take the difference between the SIP and the SAR of previous candle and multiply by the Acceleration Factor (AF), then add the result to the previous SAR (Long trade) or subtract it from the previous SAR (Short trade). 

Long Trade: SAR_Current = SAR_Previous + AF (SIP_Previous – SAR_Previous) 

Short Trade: SAR_Current = SAR_Previous – AF (SAR_Previous – SIP_Previous) 

If price makes a new SIP, add .02 to the value of AF in computing for the SAR of the next candle. If the candle does not form a new SIP, the current AF will be used to compute the SAR of the next candle. Notice the green highlight in the table of the previous page. Every time a new HI SIP is reached, the AF for the next candle is increased by 0.02. 

Examples: 

1. Let’s assume that we are computing for SAR₃ given that SIP₁ and SIP₂ are both equal to 1.62755. Since there is no new HI SIP, we will use the same AF value, which is 0.02, to compute for SAR₃. 

2. In contrast, in computing for SAR₄, we would add .02 to the previous AF because we have a new HI SIP of 1.62765. SIP₃ is higher than SIP₂. 

Also, if the SAR for the next candle is within the range of the current or the previous candle, you must use the lowest low (Long trade) or the highest high (Short trade) of the last 2 candles as the SAR for the next candle. 

The formula is repeated until the AF reaches the maximum step level of .20. When that happens, the AF for the following candles will remain at .20. Note also that the SAR only moves in the direction of the current trade. But, as soon as the price equals the value of the SAR, the SAR reverses indicating to close the current trade and open trades in the opposite direction (stop and reverse). 

Advantages

There are a number of reasons that many traders are keen in using the Parabolic SAR indicator for their trading systems. I’ve written the common ones below. 

Gives Enough Space for Price Movement

As mentioned at the beginning of this report, the Parabolic SAR functions based on time and price. This is the main feature of the indicator. When a trade is entered, the initial distance between the first SAR and the price plus the initially slow rate of movement of the SAR gives enough allowance for the price to move favorably. Once price is in a good trend and the trade is well established, the AF accelerates to move the trailing stop nearer the price, locking in more of profits for the trade. 

Predicting Probable Reversals

You may have noticed that the calculation of the next SAR value is solely based on information from previous candles. Because of this, even if the next candle has not opened yet, you already have an idea of the possible reversal point of the price, and this is the stop value for that new candle. It helps indicate when the price will most likely reverse. 

Simple and Easy to Use

Though the computation of the Parabolic SAR is a tedious task, using the indicator is actually very simple and easy to do because there will be no computation required. Once applied on the chart, the position of the dots will give you all the information you need. We will talk more about interpreting the indicator in the next section. 

Interpreting the Parabolic SAR

Now, let’s talk about what the dots of the Parabolic SAR mean. As mentioned earlier, all you need is to identify the position of the dots. 

Below the Price

Above the Price

Uses

To maximize the usefulness of the Parabolic SAR, make sure to use it in conjunction with other indicators and only when the market is trending. This is because in a flat market, the indicator will make more signals and will only cause whipsaws. 

Wilder recommends using the Directional Movement Index (DMI) or the Commodity Selection Index (CSI). The other technical indicators and techniques commonly used with the Parabolic SAR are MACD, Stochastics, Moving Averages, trendlines, support and resistance areas, and even candlestick patterns. 

Here are the main uses of the Parabolic SAR: 

Entry

By now, you may have known that an entry signal by the SAR is when the price hits the previous parabolic arc and the SAR reverses. A new series of dots then begins to form another parabolic arc. 

When used as an entry signal, make sure to place trades only when the market is trending well, and only in the direction of the trend. You can use one or more trend-following indicators to confirm this. 

Here’s an example. Using a short period SMA and a longer period SMA, when the short period SMA is above the longer period SMA, the trend is up and only Long trades will be made. A trade will be placed as soon as the dots change location from above the price to below the price. 

The same is true in the opposite situation; Short trades will only be entered when the trend is down, indicated by the short period SMA that has crossed below the longer period SMA. 

Have a look at the example below. 

As you can see, the trend is down. The 10 Period SMA is below the 50 Period SMA, and since the short period SMA is below the longer period SMA, it confirms that it’s a downtrend. Notice that the Parabolic SAR makes longer and more reliable arcs if found above the candles. This is why we should only sell when the market is in a downtrend. 

Exit & Trailing Stop

This is the most common use of the Parabolic SAR. As soon as the price touches the SAR, the current trade is exited. This exit signal is simultaneous with an entry signal. 

Have a look at the image below. 

Every trader has experienced entering a trade and making a substantial gain, but then the market suddenly begins to go the other way. The dilemma of whether or not to exit the position, how far you are willing to go, and how much profit are you are supposed to keep kicks in. At this point, your judgment will most likely be wrong clouded by your emotions. 

The Parabolic SAR can help you solve those problems. The best features of this indicator are that it’s so easy to interpret, it only moves toward the direction of the trade, and it helps traders detach themselves emotionally by providing a strategic exit. For these reasons, it’s very helpful in logically trailing your stops especially with trades where the price has well established itself in a trend. 

So, once you have acquired some profit, all you need to do is to follow the dots with your stop loss to lock in a portion of your profit for safety, while leaving enough space for the price to move favorably along the trend. 

Trend Indication & Scoring

Another way to use the Parabolic SAR is to identify the trend of the market. Of course, the trend is up when the dots are below the price while the trend is down when the dots are above the price. 

But, there’s so much more to that… 

To help fine-tune your trading signals, you can use multiple timeframes to confirm the trend, but you may have to use a different indicator for appropriate entry or exit points. 

For example, if the dots in the 15 Minute, 1 Hour and 4 Hour charts are all under the price then the trend is up. 

Conversely, if the dots are above the price in those timeframes then the trend is down. The rules for systems using the indicator this way would then require that orders will only be placed once the trend is the same in all 3 timeframes. 

A more advanced use of the indicator is to score the trend of the market, especially when coding EAs. As such, 5 multiple timeframes will be used. For example, the 1 Hour, 4 Hour, Daily, Weekly and Monthly charts. Scores will be assigned depending on the direction of the trend of these timeframes. 

Have a look at the table below. 

When 1 or 2 timeframes have the same trend direction, the score of the trend is either -1 or +1. This indicates that the trade signal is week, and entering the market at this point is risky, so traders avoid placing trades here. 

If 3 or 4 timeframes are towards the same direction, the score is -3 or +3. The market is currently showing a sustainable trend, and it’s much safer to enter trades. The entry signal is now strong enough, so most traders would prefer to enter trades with this score. 

Finally, when all 5 timeframes have the same trend, the score is -5 or +5. The entry signal is at its strongest, and trades are most likely to close with profit. 

Example

Here’s a simple system to illustrate how the Parabolic SAR is commonly used for entries and exits. It is applied using default settings (Step = 0.02 and Max. Step = 0.20) then a 50 Period SMA is applied to the chart to identify the trend of the market. 

Usually, the rules would require the following conditions: 

Buy Trade Rules: 

1. Start looking for signals when the price crosses above the 50 Period SMA. This ensures that the market is in an upward trend. 

2. While the SAR is above the price, wait for it to cross below the price. When the SAR is above the price, the price is retracing. 

3. As soon as the SAR crosses below the price, enter a Buy trade. 

4. Exit as soon as the SAR crosses above the price. 

When these rules are applied, you will have the following trades. Have a look at the EURUSD 1 Hour chart below. 

As you can see, after the price crossed above the 50 EMA then retraced, a Buy trade is entered as soon as the SAR crossed below the price. The stops are trailed until the SAR crossed back above the price where the trade is exited right away. 

When the SAR crossed below the price once more, another Buy trade is entered. However, this time, the price continued to go down and the trade is losing. As soon as the SAR crosses back above the price, it is an indication to exit and cut the losses. 

If the trade wasn’t exited as soon as possible, the losses would have been bigger, and the profits already gained from the first trade would have been lost. 

That is a simple illustration on how the Parabolic SAR can save you from a lot of trouble when you follow the exit signal. 

Application: PSAR + ATR-Filtered SMA System

Now that we have gained a much better understanding on the Parabolic SAR, let’s apply it to where we left off from our system in my previous report which was about the Average True Range. Click HERE 

if you want to review it or if you haven’t read it yet and want learn more about the Average True Range (ATR) and how you can use it to improve your trading. 

I’m using default settings for my indicators because I want my system to serve as a baseline for improvement. I highly recommend exploring all possibilities with a demo account. Feel free to experiment and tweak the settings to suit your trading style. 

Here’s a short review of the ATR-Filtered SMA System… 

When the market is quiet, indicated by a low ATR reading, we can expect it to be followed by a more volatile market wherein we can have adequate price movement to gain some profit. Using this knowledge to my advantage, I start looking at my charts for signals when the ATR is below the 0.001 level in the EURUSD. This assures me that the market has been quiet lately. Then, I enter the trades only when the ATR has crossed above that level which indicates that the market is now becoming more volatile. 

To identify the direction of the trend, I use 2 Simple Moving Averages (SMAs) in the 4 Hour, 1 Hour and 15 Minute charts. If the 8 SMA is above the 21 SMA in all timeframes, then the trend is up. But if it is below the 21 SMA in all timeframes, the trend is down. 

Once I have confirmed the trend, I compute 3 ATRs from the lowest close (Long trade in an uptrend) or highest close (Short trade in a downtrend) and enter as soon as the price crosses that level. When the SMAs cross again later in the trade, it may indicate that the price is reversing. To confirm this, I again compute 3 ATRs from the highest close (Long trade) or lowest close (Short trade) and exit when the price crosses that level. 

Having to compute for the entry and exit levels all the time is a tedious task, unless you have an EA that can do this automatically for you. So, for learning purposes, I’ve decided to use the Parabolic SAR to make entries and exits less complicated in this manual trading system. I will then use the ATR only to ensure that the market is volatile enough. With adequate price movement, I will have a higher probability of making profitable trades. 

Our system is a work in progress, but it’s looking better than ever before. Have a look the EURUSD 15 Minute chart below. 

Currency Pair: EUR/USD 

Timeframes: 

I use the 4 Hour, 1 Hour and 15 Minute timeframes to check the trend of the market. I will check for the ATR reading before entering trades with the Parabolic SAR in the 15 Minute chart. 

Indicators: 

Parabolic SAR (Step = 0.02; Max Step = 0.20) 

14 Period Average True Range (0.001 level) 

8 Period Simple Moving Average (8 Period SMA) 

21 Period Simple Moving Average (21 Period SMA) 

Rules:

Here are the improved Buy trade rules of the system. Please note that the rules are exactly the opposite for a sell trade. 

1. Wait for the price to be above the 8 SMA and the 8 SMA to cross above the 21 SMA on the H4, H1 and M15. 

I do this to ensure that I am in the appropriate trend; I will only enter a buy trade only when the trend is up. So, I consider sell signals false signals when they appear in an uptrend. 

2. The ATR must be above 0.001 level on the 15 Minute chart. 

If there is sufficient price movement, my trades are more likely to close in profit. An ATR level of 0.001 on the EURUSD 15 Minute timeframe indicates that the market is too quiet. Entering a trade will only make me stay in the trade much longer with very little profit. Even if the percentage of winning trades is the same, it may not be enough to cover any losses. 

3. Enter a Buy trade at the open of the candle if the Parabolic SAR is located below the candles. 

4. Set the stop loss at the level of the first Parabolic SAR. Trail the stop by adjusting it every time a new SAR level appears. 

The initial stop loss level will serve as my initial safety net. If the price moves against my favor, it’s highly likely that it’s reversing, not just retracing, when it reaches the first Parabolic SAR level. Once I’m in the trade, the SAR adjusts upwards to indicate that new level where the price is highly likely to reverse if it reaches that level given the current price and time within the trade. As I said before, I would rather cut my losses short before it gets out of hand. Also, I wouldn’t mind having losses if for a smaller amount. 

5. If you’re not trailing your stops, exit the trade when a new SAR level forms above the price. 

Examples

Buy Trade Example 1: 

The price was already above the 8 SMA and the 8 SMA above the 21 SMA on the 4 Hour, 1 Hour, and 15 Minute timeframes at the open of the candle along the green broken line. So, I checked the ATR and found that it was at 0.0014 level. When I saw that the SAR was below the price, I entered a buy trade at the open of that candle. I entered at 1.39577. 

I set the stop loss level at the SAR level of the candle, which is at 1.39257. As the trade progressed, I adjusted the stop to follow along the new SAR values. Later on, the price hit the stop I had been trailing at 1.40121. The trade was then closed with a nice profit of 86 pips. 

Buy Trade Example 2: 

Once I have ensured that the price and the SMAs are in proper position to indicate an uptrend, I checked the ATR and found that it’s already above the 0.001 level. However, the SAR was above the candle, so I decided to wait. 

As soon as the SAR appeared under the candle along the green broken line, the ATR was at 0.0015 so I placed a Buy order and entered at 1.38346. 

I then set my stop loss at the SAR level of that candle, which was 1.38026. Again, I trailed my stop when a new SAR level appeared until I got taken out of the trade at 1.38346 with 32 pips. 

Video

Watch this video to see more examples of how I use the Parabolic SAR to my advantage in my simple trading system. 

Comments/Notes

Because the Parabolic SAR enables you to follow the trend and identify possible points of price reversals, the Parabolic SAR has made it easier to enter and exit trades. 

It’s important, however, to remember that it is not a perfect indicator. There will be times when the price will hit the SAR as if to retrace but go back to the trend. Using it in conjunction with other indicators for confirmation would help minimize this problem. 

When using the Parabolic SAR, always note that it is only effective when used in a trending market, especially if the trend is very strong. If the price is just moving in a ranging or sideways market, the SAR will reverse frequently. 

The movement of the market is ever changing, not only with regards to the direction of the trend, but also to the strength of a particular trend. Aside from that, the parameters of the SAR need to be adjusted depending on the characteristic of the financial security it is used with. 

In developing a trading system, it’s important to note the trend-following characteristic of the Parabolic SAR. If you’d like to use your system during a ranging market, be sure to employ other techniques that are useful during those instances. 

Conclusion

Because it is safe to use the Parabolic SAR in strong trends, the number of signals will depend on whether or not the market is trending. The SAR is meant to be used with other indicators to make sure that all possible scenarios are considered and support trading decisions. Despite its limitations, the logic behind how the Parabolic SAR works presents new traders with a good starting point when studying technical analysis and learning how to trade. The Parabolic SAR is a simple trend-following technical indicator that is easy to apply when developing a trading system. 

By: 

Marcille Grapa
www.surefiretradingchallenge.com 

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