Parabolic SAR 'Tips and Tricks'
OK - well - here are MY Parabolic SAR 'Tips and Tricks'. Actually they are my personal observations more than anything else. Please feel free to add or comment.
Ideal Entry Point
Even although you are supposed to enter the moment a new Parabolic SAR Dot appears indicating a reversal some entry points are better than others.
Through observation I have found that the closer the new Parabolic SAR Dot is to the opening price the better. When the Parabolic SAR Dot is close to the opening price your stop loss (or rather stop and reverse point) is a lot closer to the opening price so if the price does go against you and you are either stopped out or you stop and reverse your initial loss is a lot smaller.
This does of course have its drawback i.e. you could get 'whipsawed out' by a small or sudden fluctuation in the price i.e. a 'spike' in the wrong direction which would probably be mainly due to news data. If this is the case I would reopen the position instead stopping and reversing. Here unfortuanately a little bit of 'personal judgment' is required.
(See attached chart below).
Spread
Parabolic SAR seems to work with any tradeable instrument. Watch out for instruments with a high spread. You have to remember that instruments with a high spread need to cover a lot of ground i.e. the price has to move quite a bit before even the cost of the spread is covered let alone put you in a profit situation.
I have had success with high spread pairs e.g. ???/ZAR but I would be cheating if I did not tell you that with ???/ZAR for example I do look at other things before entering a position e.g. with ???/ZAR I look at the 'state' of Parabolic SAR on Gold because I know that the movement of ???/ZAR is directly related to the movement of Gold. This 'rule' would also apply to ???/NZD and ???/AUD etc. etc. (the 'Commdolls'). On the other hand - if you can get away with this and things go in your favour price wise - the payout of high spread pairs is normally 'magical' (as are the potential losses of course).
Another thing that helps me here is the fact that at the broker where I trade 'forex only' I open and close my positions using their Level 2 platform. The spreads are variable and are always tiny compared to the spreads at my other two brokers and sometimes there is no spread at all on the major pairs. This makes a huge difference when it comes to the high spread pairs as well i.e. the high spread is not that high if that makes sense.
Late Entry
While I have gone to great lengths in this thread to discourage myself and others to refrain from opening positions late i.e. when there is already more than one Parabolic SAR Dot being displayed I have noticed that it is possible to open positions late when the current price is equal to or better than the price of the instrument was at the time that the very first Parabolic SAR Dot appeared. The benefit of doing this is that once again the difference between the value of your stop loss or stop and reverse point and the price at which you are opening the position is far less than it might have been had you entered when the very first Parabolic SAR Dot appeared. It also has the added benefit that at this point you can be pretty certain that a trend has started. The drawback of course is that if you wait for these late entry points to present themselves you may get into very few trades and miss those trades that start trending almost immediately from the get go.
(See attached chart below).
Parabolic SAR 'Beauty'
The 'beauty' of this indicator is that it does not seem to care about fundamentals, technical analysis, or the current state of the market on the longer timeframes i.e. Daily and longer. On these timeframes you are (almost) immune from 'spikes' caused by news data etc. etc.
Timeframes
The amount of profit / loss that will result from the use of Parabolic SAR is in direct proportion to the length of the timeframe being used. While Parabolic SAR will work on any timeframe I have observed that the shorter the timeframe the smaller the profit / loss and on the shorter timeframes the loss seems to (in most cases) exceed the profit unless you are really lucky and get into a long and 'violent' trend which does not happen very often. In addition to this, as previously stated, your are far more vulnerable to 'spikes' normally caused by news data etc. etc.
Parabolic SAR and MACD
While this is not 'pure' Parabolic SAR you can certainly protect yourself from 'whipsaws' by using something like MACD (please don't tell me that this is like Jame's 30 Minute Parabolic SAR and MACD EUR/USD System). I use Parabolic SAR to open a position ('pure' Parabolic SAR) and will monitor MACD if and only if a new Parabolic SAR Dot appears in the opposite direction indicating that I should stop and reverse BUT my 'gut feel' tells me that this is just another 'spike'. I will then use MACD to 'filter out' the false stop and reverse and hold on until MACD actually crosses in the opposite direction before actually stopping and reversing. While this is not necessary when using 'pure' Parabolic SAR it may very well save you from falsely opening and closing or stopping and reversing more than is necessary thus saving you commission or the cost of the spread.
Multiple Instruments
The 100% success that I have had so far with Parabolic SAR has been largely due to the fact that (with forex) I trade at a broker that has forty four pairs available for trading at present. Each morning I check the daily chart of each and every pair and do one of two things: I either open a new position if there is a new Parabolic SAR Dot appearing indicating a reversal or I adjust my stop loss or stop and reverse point based on the new value of Parabolic SAR for that day. From my experience almost all of the open positions / pairs show a profit almost immediately and the ones that show a loss from the get go are negligable in relation to the ones that show a profit. The basic theory behind this practice is that the more positions / pairs you have open the less likely it is that every single position that you have open will go against you and the nett result of all of the open positions will be a profitable one. The only important thing to remember here is that you need margin - loads of it - and my margin I mean 'free margin' not just starting capital. You have to be able to take the losses which are inevitable when using this indicator in order to ride the profits.
SMS / Email Alerts
The proprietary trading platform of the broker where I trade 'forex only' will automatically send you an email message within a few seconds of the execution of a stop order or limit order telling you that the order has been executed and at what price (and what the current price is at that very moment). I have these messages routed to my mobile phone. This works like an absolute dream i.e. I check the daily charts each morning and adjust my stop losses or stop and reverse points based on the current value of Parabolic SAR (as detailed above) and close the trading platform. Should my mobile phone alert me that a stop order has been executed or a stop and reverse point has been reached I am made aware of the fact almost immediately. With this broker WAP (at no charge) is offered so I can be anywhere anytime and I can immediately login and observe the current situation and either perform a stop and reverse or opt to wait until a new Parabolic SAR Dot has appeared the next day as confirmation etc. etc. The 'beauty' of having this facility is that it ensures that you 'stay away' from the trading platform and don't get 'cold feet' when it appears that price is going against you (this 'action' has cost me a lot of money in the past). As long as my mobile phone does not give me an SMS alert I know that I'm still in the trade and price is going in the right direction. This is phsycologically 'calming' and, in my case, allows me to concentrate on stocks without having to worry about my forex positions.
Altering Parabolic SAR Parameters
It is possible to alter the parameters of Parabolic SAR. I have not based any trades on modified Parabolic SAR parameters and am currently investigating the pro's and con's of altering the default parameters. So far I have found that it is possible to modify the default parameters in order to make the indicator more 'sure' as it were and it appears that the success of the modifications are particular to the instrument concerned. In other words the default parameters will work with all instruments to a greater or lesser degree but you could, for example, 'fine tune' the parameters of Parabolic SAR to suite GBP/JPY or the Dow or the DAX for example. The idea is to modify the parameters of Parabolic SAR for each particular instrument so that ideally the signals given get you in as early as possible, get you out as late as possible, and keep you in the trend for as long as possible. Like I said - this is a long term study I think - and something which I am certainly looking into for the moment.
I have noticed that not all representations of Parabolic SAR are equal i.e. I trade at three different brokers. The representation of Parabolic SAR at two of them is almost always identical (on a few occasions give or take a dot or two) while at the third I receive many more false signals which result in 'whipsaws'. So far I have managed to make the representation of Parabolic SAR at the third broker almost identical to the representation at the other two brokers.
I have also noticed that you can 'tweak' Parabolic SAR for different strategies e.g. do you want to open a position and stay in a very long term trend or do you want to trade much shorter timeframes and 'scalp' the market.
Caution should be used when modifying the default paramaters however as there is a definite tradeoff between 'getting in early' and then losing more profit when the reversal comes.
Please note that 'tweaking' Parabolic SAR and shortening the timeframes has never worked for me. Also remember that when this indicator was developed by Mr J. Welles Wilder they were trading manually i.e. no computers, realtime data, etc. etc. like we have today so the plotting of Parabolic SAR was done at the end of day on graph paper so that tells me immediately that this indicator was designed and tested and is optimized for the daily charts.
Falsely Stopped Out
Another observation is this: assuming that you are, or rather have been, in a lovely trend and have now just been stopped out. 'Pure' Parabolic SAR dictates that you would immediately stop and reverse at this point. On more than one occasion I have noticed that it is better to wait for the next day (again assuming that you are basing your trades on the daily charts) for a new Parabolic SAR Dot to appear in the opposite direction before opening the stop and reverse position. Too many times I have noticed that sometimes you get stopped out due to a price 'spike' (I did say before that you are 'almost' immune to 'spikes' but not always) and then the price continues on in its former direction. In this case I would do nothing and wait for the next day (assuming daily charts once again). Sometimes (the next day) a new Parabolic SAR Dot does not appear and the price continues on its merry way as before and usually ends up trending for days.
Conclusion
These are all the 'little' things that have 'come to mind' over the past couple of months (off and on) and by the looks of things there are many more 'quirks' to this indicator to be uncovered that could make it an even bigger 'winner'. This could very well become a 'study' I reckon (and some people wondered why Bill Williams and the like write books about trading and share their knowledge - I'm not even getting paid for this)!!!
All jokes aside - this indicator seems to work well for me for the simple reason that it relies very little on my limited knowledge of the market and trading and is pretty much 'purely mechanical'. It tempers my emotions i.e. I am (and probably will always be) the kind of trader that cannot stand losing money and am inclined to bail out of a trade the moment I 'feel' that I cannot take any more loss on a position and on almost every occasion that I write the loss off I find myself wanting to jump off something high because I took the loss based on my so called 'instinct' and the price has retraced and had I not taken that loss I would have made money instead of losing it and slowly but surely ended up reducing my capital and available margin, wiped the account out, and then had to fund it again and I can assure you that this has happened several majestic times!!! This indicator also takes the 'guess work' out of where to place your stop loss - also good for me.
If there is one thing for certain that I have learned the hard way: trading is not 'easy' money - it's not 'gambling' - it's not even quick money. Probably the most precious lesson that the market has taught me is 'patience' and I believe that whether you use Parabolic SAR, any other indicator, or any other 'system' - if you are not patient - you will lose money - no question. As an example: I am right now sitting with a single position on the Dow which at the moment is sitting at a $6K loss. Some months ago I would have written this money off and refunded the account. Now I have learned to forget about that loss and keep trading other instruments in the meantime because I do know for sure that it may be next week, next month, or even next year, that the Dow will get back to the level at which I opened this position (OK - I'm fortuanate because at this broker I can still trade the same instrument without affecting any currently open positions on the same instrument) and this position will probably turn a profit eventually. Had I been using Parabolic SAR at the time there is no question that I would not be sitting with this losing position (I don't trust the Parabolic SAR representation at this broker) but it's too late now. I believe that the 'keys' to using Parabolic SAR, any other indicator, or any other 'system' is to 'stick with it', don't give up when you incur a loss or two, and above all, have patience. Specific to Parabolic SAR - I see it as a 'long term savings account'. In other words - I believe that once you have all of your positions open and you just keep mechanically stopping and reversing day in and day out, month in and month out, and year in and year out, even with the inevitable losses your account balance will slowly grow to an amount to be reckoned with and don't be put off by the word 'slowly' - I can assure you that the growth of your account will put any bank to shame!!!
Cannot continue editing. Limit of 15000 characters reached. Will contact admin to see if they will allow me to continue editing here.
Dale.
Last edited by dpaterso; 08-18-2007 at 06:22 AM.
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