PSAR and Stochastics Forex Strategy

Introduction to the PSAR and Stochastics Strategy

The strategy seeks to identify a new trend on the currency pair. It is best deployed on the hourly chart. This strategy is a short term strategy which is good for intraday trading.

Indicators Used:
The indicators deployed for this strategy are:

  1. The Stochastics oscillator set to 5,3,3. The indicator is modified by adding a line at the 50 mark. This is what will be used.
  2. The Parabolic SAR indicator

The Strategy

So how is this strategy setup? This strategy involves the use of the Parabolic SAR indicator to pick out the trend and using the Stochastics oscillator as the confirmation for the trade. This is because the 50 mark is the halfway point of the momentum oscillator. A Stochastics value between the oversold level and the 50 mark is deemed to be bullish while a Stochastics value between the overbought level and the 50 mark is deemed to be bearish.

Multiple time period analysis must be used to pick the trend direction from the daily chart as well as the 4hr chart. This provides the direction for the trade on the hourly chart.

Check the trend on the daily chart. Thereafter, step down to the 4 hour chart and see if it also confirms the trend on the daily chart. If it does, open the hourly chart and check to see where the Stochastics lines are in relation to the 50 mark.

The entry is made based on the crossing of the lines above or below the 50 point, as well as the position of the Parabolic SAR indicator.

1) Long Entry

A long entry should be made in the following circumstances:

  1. Trend is on the upside when checked on the daily and 4 hour charts.
  2. Stochastics oscillator lines cross below the 50 line, showing that asset still has upside momentum. The closer the cross point is to the oversold region, the more room the trade has to move in the trader’s favour.
  3. Parabolic SAR indicator signal is bullish. Open the long trade at the open of the next candle.

ParaStoklong

On this chart, we can see that the Stochastics oscillator has performed a cross below the 50 mark while the Parabolic SAR indicator was showing a bullish signal. Usually the cross occurs a candle before the Parabolic SAR starts to show the bullish signal. The trade is therefore opened on the candle where the Parabolic SAR indicator shows a bullish signal (the candle on the first or 2nd dot is ok for entry).

Stop Loss

Place the stop loss a few pips below a recent support level such as the recent candle low.

Take Profit

The TP point should be set 50 pips. However, another way of taking profits may be to wait for the Stochastics oscillator to reach overbought levels before taking profits.

2) Short Entry

A short trade is performed when a downward trend is seen first on the daily, chart, and then on the  4 hour charts. Once this has been confirmed, the trade is setup as follows:

  1. a) The lines of the Stochastics oscillator should cross above the 50 mark. The closer the cross is to the overbought area, the more room the trade will have to move into profit.
  • b) Once the Parabolic SAR dots appear above the candlesticks (bearish signal), the trader should enter short on the open of the next candle.

 

ParaStolshort

The short trade setup is shown in this snapshot above. Here, we can see that the trade entry sets itself up very well and the currency pair moved quite well too before it headed into oversold territory. This is where the trader can set the trade exit.

Stop Loss

The trader should set the stop loss a few pips above a recent candle high.

Take Profit

The Take Profit can either be set at a fixed value of 50 pips or can be set at the area where the Stochastics oscillator is at the oversold area as displayed on the chart.

Conclusion

The extremely short term nature of this trade means that the trader must observe this trade continuously from start to end. The trade entry must be practiced thoroughly on a demo account because this is where most traders miss it. Once the trade entry technique has been mastered, the placement of the exit point for the trade comes easily.

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