Parabolic SAR Dot Breakout System

Introduction

This strategy involves using the Parabolic SAR in its default settings as part of a price breakout system which is very simple to use. It can be used on the hourly and daily charts of each currency pair to be used for this strategy.

Indicators

The only indicator used for this strategy is the Parabolic SAR, used in its default settings.

The Strategy

For those not used to the complexities of using multiple indicators, this is the forex strategy that typifies simplicity. All the trader needs to do is to apply the Parabolic SAR indicator to the daily chart so as to detect the trend of the currency pair. The daily chart is the best representation of the trend of the asset.

Following detection of the trend of the currency pair, the analysis moves down to the hourly chart. The same time period on the hourly chart which corresponds to the trend on the daily chart is pulled up and a search is made for when the price action breaks the dots that make up the Parabolic SAR indicator in the direction which is opposite to that on the hourly trend, but in the direction of the trend on the daily chart.

1) Short Trade

In other words, if the trend on the daily chart is seen to be going downwards, then the signal to look for on the hourly chart is for the parabolic SAR dots below the candles, and to initiate a short trade when price breaks below a trend line drawn to connect the dots. It becomes clearer on the charts below.

ParaDotdail

Take a look at the daily chart for the EURUSD which shows the currency pair in a downtrend. This is supported by the position of Parabolic SAR dots, which are found above the candles. The date in view is December 22, 2014.

Heading to the hourly chart of December 22, 2014, we see that the Parabolic SAR is initially showing up under the candles. So what we do in order to trade with the larger trend (downtrend) is to draw a trend line which cuts across the last dot of the Parabolic SAR, then wait for price to break this line downwards. If the breakout candle moves too far, allow the price to pullback to the trend line, then use a Sell Limit order to initiate the short trade.

ParaDothour_short

Stop Loss

The stop loss is set to about 10 pips above the entry point (shown on chart).

Take Profit

The Take Profit level is set to the point where the Parabolic SAR dots reappear under the candles, or it can be set to a level that is equivalent to double or triple the stop loss.

2) Long Trade 

The trader searches for a currency pair in an uptrend on the daily chart. This is supported by the appearance of the Parabolic SAR indicator below the price action candles. When this has been done, the next step is to go to the hourly chart, and look for where the dots of the Parabolic SAR dots are hanging above the candles on the day in reference. Trace a trend line that cuts across the last of these dots, then wait for price to break above this line. Allow for a pullback, then place a Buy Limit order using the trend line as entry price.

The long trade example was taken from the GBPUSD charts of April 6 and 7, 2014. We display the daily chart here, which shows that the currency pair is trending upwards.

ParaDotdail2

We head down to the hourly chart, which shows that on the day in focus, there was an initial placement of the Parabolic SAR under above the candles. A trend line is drawn across the last dot, and we watch for a break of this trend line, which occurred the following day as shown in the chart below:

ParaDothour_long

In this example, the close of the breakout candle was so close to the trend line that the trade is one that could be initiated immediately without waiting for a pullback. The beauty of this strategy is that there is no need to use any other indicators. Simply know what to do with the Parabolic SAR indicator as we have indicated and the trader will bank some good profits.

Stop Loss
The stop loss for the trade is set to a few pips below the trend line which has been drawn to form the reference point of the trade.
Take Profit
The Take Profit for this trade is set at the trader’s discretion, but must use the technical parameters we have mentioned in previous articles.
Conclusion

The beauty of the strategy lies in how simple it is to use and execute. It requires only one indicator. However, it is advisable to practice this strategy thoroughly on the charts so that the best results can be obtained when used on a real money account.

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