The research I've done with PSAR is that it should not be used to enter trades, but to exit only. Use moving averages, MACD, RSI, ADX, inside bar, random entries, etc, etc, whatever works with you to enter trades, and then use PSAR to help you exit the trade. That's what I'm doing now after testing PSAR for almost 5 months now. I use PSAR as a guide to where I should place my trailling stops, but I don't blindly accept what PSAR tells me, you should look at what the price is doing, chart patterns, pivot points, etc, and then decide where to put the stops. Sometimes the stops indicated by PSAR are so stupid that I just ignore them. This is usually caused by huge price spikes. On other occasions the stops are just perfect, especially in those long and well defined trends. PSAR is a useful little mathematical tool but adding a bit of human thinking to the mix will improve your system considerably. Trade longer time frames (daily if possible) so you can have all the time in the world to properly look at the chart.
Also, stopping and reversing is not a good method either. The chances of getting a very long streak of consecutive losses increase dramatically if you use the original "stop and reversal" method. All trading methods have series of consecutive losses, it is inevitable, but in a ranging period PSAR will kill you if you are always in the market. You can easily get 10 consecutive losses, followed by small wins and then another 10 consecutive losses. In my tests I had up to 18 consecutive losses. Maybe it works with commodities, but currencies I don't think so. You should only trade in the direction of the long term trend, if the trade stops wait for another entry signal, don't reverse it. It's better to have less trades, but ones with much higher probability of being profitable.
Another thing, PSAR is highly susceptible to price spikes, so I'm my system I have 2 PSARs on the same chart, one is the original 0.02; 0.02; 0.2 using the high, close and low prices of the bars. The other is also 0.02; 0.02; 0.2 but it only takes into account the closing price of the bars. This one gives smaller initial stops, less reversals and smoother trends, try it on your charts. Note that this PSAR will only reverse if the candle CLOSES below/above the PSAR, unlike the original PSAR that reverses as soon as the price HITS the PSAR. I look at both PSARs, this gives me a much better feeling of what the market is doing and where I should put the stops. I usually put the initial stop loss using the modified PSAR, and then as soon as the price moves in my direction swith to the original PSAR. Or I can use an average of both... No 2 trades are the same so I try not to have a rigid rule regarding my exits. A mostly mechanical system with a bit of price action analysis is much better than a pure mechanical system, in my opinion
getting there..
Linear Mode
