Today we will look at the Parabolic SAR & Awesome trading strategy . It does not apply to those common in the financial markets, including Forex , but at the same time it is quite simple to use and does not require any specific knowledge from the trader.
Description of the strategy
Parabolic SAR & Awesome has several technical indicators with different mathematical backgrounds to help the trader analyze the current momentum from different perspectives. At the same time, the best performance of this strategy is achieved on 30 minute timeframes . This strategy was originally developed for two currency pairs that correlate with each other – EUR / USD and USD / CHF . At the time of the development of the trading strategy, these pairs were the most technically correct due to the large trading volume, acceptable volatility and the absence of sharp fluctuations and reversals.
Parabolic SAR & Awesome strategy indicators
Indicators used in the Parabolic SAR & Awesome strategy:
- Parabolic SAR (0.01, 0.1);
- EMA 5;
- Awesome Oscillator.
The first indicator is Parabolic SAR . Its purpose in this strategy is to show the direction of the momentum . The principle of its operation is quite simple: if the indicator points are below the current price, then there is an upward trend in the market. Visually, it looks like nudging the chart from below. If the indicator points are located above the chart, then there is a downtrend in the market; visually, the indicator points seem to press the chart. The principle of calculating the indicator is as follows: Parabolic SAR compares the closing and opening prices during the selected period and indicates the more likely direction of price movement. It also shows the reversal points when the indicator points jump under the candles or, conversely, over the candles. In this trading strategy, we need Parabolic SAR to assess the current trend. Indicator settings: step – 0.01, maximum – 0.1.
The second indicator, EMA 5, is a Moving Average that is calculated using the exponential method with a period of 5.
Among the EMA 5 settings for the Parabolic SAR & Awesome strategy:
- Apply to Close
- We do not apply a shift in this case.
The third indicator is the Awesome Oscillator . It will serve as a signal confirmation tool, however its importance should not be underestimated. The reason is that the Awesome Oscillator shows the momentum of the market with a histogram: if it is above the zero mark, then the trend is upward, if below, then the trend is downtrend. The color of the histogram bars also matters, as it sometimes happens that the bullish momentum weakens during an uptrend, which in turn signals a possible period of consolidation or even the likelihood of a reversal. In this case, the Awesome Oscillator changes the color of its bars from green to red (uptrend, bearish threat) or from red to green (downtrend, bullish threat), even if they are above or below the zero level, respectively. Here we are looking for continuation signals , so the Awesome Oscillator should keep its color bars during an open position. The indicator does not have any settings as such, it is only possible to change the color scale and line thickness (to your taste).
How to trade with the Parabolic SAR & Awesome strategy
Opening trades using the Parabolic SAR & Awesome trading strategy is based on entering the market at the beginning of an emerging trend on a 30-minute chart and only if there are signals from all indicators used in this strategy.
Opening a buy position using the Parabolic SAR & Awesome strategy
The Awesome Oscillator indicator goes into the positive zone and starts drawing green histogram bars. Ideally, you need to wait for two fully formed bars, with the color being critical. If the indicator alternates between green and red bars, then it is not recommended to enter a trade. The Parabolic SAR indicator is located below the chart. If the indicator points alternate, then from above, then from below, we do not open a deal. Usually, at the correct buy entry point, the chart will look like a rally. The EMA 5 indicator will move within the boundaries of the candles, but for the correct entry point, we need to wait until the price moves away from the Moving Average. Ideally, a candlestick should close above EMA 5, and the next one should open without touching the movable. If all these conditions are met, a buy position is opened . According to information from various sources, a Stop Loss order is placed 20 (200 for a five-digit terminal) points below the opening price of a position, while Take Profit is set at 15 (150 for a five-digit terminal) points above the opening price. In my opinion, this is not very correct due to the fact that Stop Loss is greater than Take Profit, in this case even 50% of profitable trades will lead to loss of the deposit. On the other hand, this significantly increases the chances of closing a deal at Take Profit. A better option would be to set a fixed Stop Loss, for example, at 20 (200) points, but not to set Take Profit, but to monitor the open position and close it manually. A condition for closing a position in profit can be a trend change according to the Parabolic SAR indicator (the indicator has moved under the chart) or a trend change on the Awesome Oscillator indicator (the histogram has moved into a negative zone).
Opening a sell position according to the Parabolic SAR & Awesome strategy
The Awesome Oscillator indicator goes into the negative zone and starts drawing red bars of the histogram, ideally it will be two bars of the same color pointing down. As with a buy, if the bars are of different colors, then the trade should not be entered. The Parabolic SAR indicator is above the chart, and visually the chart will look like a downward trend. If the chart starts to move in the horizontal plane, then we do not open a position. The EMA 5 indicator moves within the boundaries of the candles, but, as with the purchase, we need the price to break away from the Moving Average and the candle closes below it. Further, if a new candle is opened outside the EMA 5 boundaries, you can open a sell deal. Stop Loss is set according to the same principle as with purchases at a distance of 20 (200) points from the trade opening price. Take Profit by 15 (150) points. At the same time, in my opinion, it is better to use the strategy of placing protective orders in the same way as in purchases.
Despite the fact that this strategy was developed only for two currency pairs, you can try to adapt it for other instruments. It all depends on the trader. Only in this case it is necessary to strictly observe the conditions for opening positions. When adapting the Parabolic SAR & Awesome strategy for high-volatility pairs or cross-rates, it is necessary to take into account the risk management rules for setting Stop Loss.