Parabolic SAR Binary Options Strategy

Screen Shot 2014-06-17 at 11.12.19

 

Video Transcription:

Hello, traders. Welcome to Day Trading Binary Options. In this lesson, you
will learn how to trade with the Parabolic SAR. With this indicator, you
will actually learn how to trade reversals on tops and bottoms and
continuations, to trade with the trend.

Now, let’s start. What is the Parabolic SAR? Well, the Parabolic SAR stands
for stop and reverse. The SAR trails price as the trend extends over time.
In an up market, the indicator is below price. In a bear market, the
indicator is above price. This indicator stops and reverses when price
direction reverses and breaks above or below the indicator. Since the SAR
follows price, it can be considered a trend-following indicator that will
help us to trade in the direction of the trend when price corrects. As its
name implies, it’s also designed to identify turning points in the market.
Now, we’re going to use this indicator for two specific types of settings.
One: to trade with the trend. Two: to counter trend trade on bottoms and
tops.

Basically the signals are very alike, but they differ because one; when we
are trading with a trend, we are not going to use support and resistance
levels. We are going to use purely the indicator. When we are actually
counter-trend trading or picking tops and bottoms, we are going to use
support and resistance levels. But let’s move forward so you can better
understand what I’m talking about. The first thing we are going to do is we
are going to use the Parabolic SAR to identify the trend. This is easy,
guys. When the Parabolic SAR is below price, we are in an up-market, and
we’ll be looking to buy calls. Remember that with this indicator, we are
going to try to trade with the direction of the trend. So when the market
is up, we are going to try to buy calls. Of course, when the market is
down, the indicator is above price, and we are going to look for short
opportunities to buy puts.

Now, here are two examples of a bear and bull market ID, with a Parabolic
SAR. Now, as you can see, we are in a clear uptrend. The SAR is below
price. These dots right here are the indicator. When these dots are below
price, we are in an up-market. You can also see that we are in an up-market
because we are making higher highs and higher lows. So we are definitely in
an up-market.

On the contrary, you can clearly see that here we are in a very strong down
move because we are making lower lows and lower highs. The indicator or the
Parabolic SAR is above price. When the Parabolic is above price, we are in
a down-market. In this case, the downtrend is very clear to our eyes. So,
this is the first thing we are going to do because we need to use this
indicator in a trending market. If the market is not trending, it is going
to be very difficult to use it because we are going to get a lot of false
signals in ranges and chop environments. So the first thing is to spot the
trend.

At the bottom of a down move, the Parabolic SAR will stop printing above
price and will continue printing below it, following price direction. This
is called a stop-and-reverse. Contrarily, at the bottom of a down move, the
Parabolic SAR will stop printing below price and will continue printing
above it, following price direction. So here are two examples of stop and
reversing a top and a bottom of a price action chart. Here, you can see
that we were in a down move. Then the Parabolic SAR stopped, and then
continued following the reversal to the upside. Here, we are at top. You
can see clearly that the Parabolic SAR is printing below price, which means
that we are in a steep up move. Then the Parabolic stops printing and
continues printing following the reversal to the downside. So this is what
SAR stands for. It stands for stop and reverse, and this is what it exactly
means. This is what we are going to be looking for when we look for our
signals to buy either calls or puts. Now, let’s go to the actual setups.
Now, the first setup we are going to learn is the trend-following signals.
Okay? A bullish signal occurs in an uptrend. In an uptrend, you look for a
correction to the downside, a stop and reverse. After the correction, when
price crosses above the stop, you have a signal to buy calls. Contrarily, a
bearish signal is found in a downtrend. In a downtrend, you look for a
correction to the upside, which is also a stop and reverse. After the
correction, when price crosses above the stop . . . below the stop, I’m
sorry, you have a signal to buy puts.

Now, here’s an example of a bullish signal. You can clearly see that we are
in an uptrend. We are making higher highs and higher lows. The Parabolic
SAR is printing below price. Here, we have a stop and a reverse. Of course,
because we are in an uptrend, we can assume that this is just a correction
to the downside before continuing with the move to the upside. When price
crosses above the stop and continues to the upside, we have a signal to buy
calls in this instrument. In this case, we have two signals. You can see
that we are in an uptrend. We have a correction. We have a stop and a
reverse, and then we have a clear breakout of the stop and reverse. Again,
here we have a stop, a reverse, and a clear breakout of the stop and
reverse. So this is what you will be looking for when you want to buy calls
in an up-market.

Contrarily, in a bear market, you will be looking for opportunities to buy
puts. In this case, we are in a very steep downtrend. Right here, when we
correct . . . Well, we are in a downtrend, and we have a stop, a reverse,
and a breakout. When we have the stop, reverse, and the breakout and the
continuation, of course, of the flow to the downside, we have a signal to
buy puts. Now, it looks very easy, and it is actually very simple. You just
have to be very disciplined in order for you to be able to trade these
setups. You need a clean breakout of the stop and reverse and a
continuation, in both cases, to have an accurate signal to buy either calls
in a bull market or puts in a bear market.

Now, let’s go with the counter-trend trading strategy or the tops and
bottoms. A bear signal occurs at the end of an up move and at a strong
resistance area, and we look for a cross below the stop to buy puts. Again,
we are looking for a stop and reverse and a breakout to buy puts. A bullish
signal occurs at the end of a down move. At the end of a down move, at a
strong support area, look for a cross above the stops to buy calls.

Now, let’s have a look at a bearish signal. This is a chart actually of the
Aussie/US dollar, four-hour. Here, we actually have a strong area of
resistance. When we go to the empty floor platform, I’m going to show you
this actual chart so you can actually see that we are not lying here and
that these are actually very strong areas of resistance and support. Now,
we are in a clear up move. We hit an important area of resistance. We have
a stop, a reverse, and a breakout, and a continuation. So we have a clear
signal to buy puts on this counter-trend trade. Contrarily, a bullish
signal occurs at an area of support. Right here, we have a very strong down
move. We have a stop, a reverse, and a breakout. So we have a clear signal
to buy calls in this case.

Now, let’s go through the considerations. The general rules for these
systems are: The Parabolic SAR can be used as a trend-following tool or to
counter-trend trade. This indicator must be used in trending market because
if you use it in ranges, tight ranges and choppy markets, you are going to
get a very good amount of false signals.

For the signals to be valid, we need a strong break of the stop in the
direction we want to trade. The rules are that the system can be applied to
any timeframe and expiration times you feel more comfortable with. But
remember to choose your expiration’s according to the timeframe you are
analyzing price action on. So let’s go to the empty floor platform now. All
right. So here’s the empty floor platform. As I told you, we’re going to
look at the Aussie/US dollar four-hour chart, for you to see that the
examples that I show you on the lesson are actually accurate. I’m sorry. I
have to hide my trades because I do have some trades open during the
weekend. Okay.

So here’s the four-hour charts. If we go to a daily chart, this is the area
of resistance that I showed you. Now, if we go to the weekly chart, you can
see that this is actually the area of resistance that was tested as support
here, here, here, here. And if we go even back more, we have a strong area
of resistance here. So yes, this is a very strong area of resistance on the
weekly, daily, and even four-hour chart. Okay? Now, if we continue . . . We
already looked at this example on the Aussie/US dollar. Right? This is what
I was telling you about if you are trading on a range with the Parabolic
SAR. Well, because this is the daily chart, you might get a little bit more
room to trade ranges, but you have very bad . . .

I mean, let’s imagine that this is the 15-minute chart, and you are trading
hourly expirations. You decide to enter at this breakout. Since we are in a
range, you most certainly will not get continuation of the move, and you
will get . . . I mean, your option will expire out of the money more than .
. . a higher percentage than they normally do on ranging markets. Okay? So
if we continue here on the daily, check it out. Here’s a very good example
of trend-following signals after this stop and reverse, at this bottom
right here. We had this stop and reverse at this bottom. Then we continued
to the upside. But because we have not taken out this high just yet, we
don’t know if we are in an uptrend. So, if I was trading actually this
chart, I would not have taken this entry. I would have waited for
confirmation that we are actually in an up move, and we have switched or we
have reversed. Now, after this stop and reverse, we continue to the upside,
and we have another stop and another reverse.

Now, this stop and reverse looks more likely. We have not taken out this
high just yet, but we have already stopped and reversed once and continued
with the up move. Now, after this stop and reverse, you can see right here
that when we break with this reverse or this stop and reverse, we continue
to the upside. I mean, this is the daily chart. If we are trading the daily
chart, we can trade the end-of-week, maybe the end-of-month expiration
options. But, let’s assume that this is actually a five-minute chart, and
we want to trade the 30-minute expiration options. So this one, two, three,
four, five, six, seven. We would have ended up in the money. As you can
see, you have to let your trades breathe a little bit. Because if you
don’t, sometimes you will get caught up in a small continuation pattern
before the actual moves continue.

So if you are analyzing the price action on the 15-minute chart, you can
choose the two-hour or the hourly expiration option. The hourly on the 15-
minute chart is cutting it close, in my opinion, but you need to trade
where you feel comfortable. So let’s go back here. We have another range.
Here, we have another amazing up move. This is a fantastic up move. We have
here a stop, reverse, and a trade. Then here, we have a stop, a reverse,
but we never crossed above this high or this reverse. So we need to wait
for further correction to the downside. When we correct to this area of
support and we cross above this reverse and we continue actually to the
upside, here you can see that we didn’t continue to the upside. So this is
what we call a ranging market. You can identify it with the Parabolic SAR
too.

But when we cross above the stop and reverse here and we continue to the
upside, we have a signal to buy calls. Again, here we have a stop and a
reverse. Well, we have a reverse. We don’t have continuation or breakout,
and we continue with the reverse. Now, we have a continuation to the
upside. Here, we crossed above. Remember that we need a clean break above.
So this week’s high is not a clean break. We need the candle to close above
and break above, in this case, the stop and reverse for us to be able to
buy calls. So the actual entry is right here at the end of this candle.
Here, it is at the end of this candle. Okay? We need clean breakouts.
Basically, this is how you trade with the Parabolic SAR, following the
trend and, of course, picking tops and bottoms of very important support
and resistance. Remember that you can use this on any timeframe that you
wish. Just make sure to choose your expirations accordingly.

Adam

More About

Adam is an experienced financial trader who writes about Forex trading, binary options, technical analysis and more.

View Posts - Visit Website

Comments are closed.