PSAR Trend Forex Trading Strategy

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PSAR Trend Forex Trading Strategy 1

Profitable trend following strategies are based on identifying trends and trading according to the direction of the trend. This allows traders to take trades that have a relatively higher probability compared to other trade setups. Different traders take different approaches in identifying trends. Some swear by naked charting, trendlines and channels. Many prefer using moving averages, while others would rather used other trend following indicators. Each has its own advantages and disadvantages. However, if any of these approaches are mastered well by a trader, all of it could work and yield some profits.

The PSAR Trend Forex Trading Strategy is a trend following strategy which is based on indicators. This allows traders to make decisions objectively based on rules and lessen subjective decision making.

Parabolic Stop and Reverse

Parabolic Stop and Reverse, also popularly known as PSAR, is a trend following indicator which was first introduced by J. Welles Wilder, Jr. It plots dots on the price chart to indicate trend direction. If the dots that the PSAR plots are below the current price action the trend is considered bullish. However, if the dots are above price action, then the trend is considered bearish.

The PSAR’s computation revolves around the concept of Extreme Points (EP). Extreme Points refer to the highest value during an uptrend or the lowest value during a downtrend. Because PSAR emphasizes Extreme Points, the values it plots are quite distant from the current price action. In fact, if price reaches these points, the trend is already considered to have already reversed. This why it called Parabolic Stop and Reverse.

Because of the idea that the dots it plots are points wherein the trend is already considered to have reversed, the dots are very well suited to be used as price points to place stop losses or trail stop losses on. It also makes the shifting of the dot’s placement, either above or below price, excellent entry signals. The entry signals generated by the PSAR are at points when the market is considered to have already reversed the trend.

Forex Trend Signals Indicator

The Forex Trend Signals Indicator is a trend following indicator which pinpoints entries based on the trend. It prints lime bars whenever it detects bullish trends and red bars whenever it detects bearish trends. These changing of colors tend to coincide with the changing of the mid-term trend.

Trading Strategy

The PSAR Trend Forex Trading Strategy is based on the confluence of the Parabolic Stop and Reverse indicator and the Forex Trend Signals Indicator. These indicators tend to compliment each other, showing entry signals based on the mid-term trend.

Indicators:

  • Parabolic Stop and Reverse
    • Step: 0.003
    • Maximum: 0.2
  • Forex_Trend_Signalsv1

Timeframe: 1-hour, 4-hour and daily charts

Currency Pairs: major and minor pairs

Trading Session: Tokyo, London and New York sessions

Buy Trade Setup

Entry

  • The Parabolic Stop and Reverse indicator should start printing dots below price action indicating a bullish mid-term trend
  • The Forex Trend Signals indicator should change to lime indicating a bullish mid-term trend
  • These bullish reversal signals should be somewhat aligned
  • Enter a buy order on the confluence of the above conditions

Stop Loss

  • Place the stop loss at the support level below the entry candle

Exit

  • Close the trade as soon as the Parabolic Stop and Reverse indicator prints dots above the price action indicating the start of a bearish mid-term trend
  • Close the trade as soon as the Forex Trend Signals indicator changes to red indicating the start of a bearish mid-term trend

PSAR Trend Forex Trading Strategy 1

PSAR Trend Forex Trading Strategy 2

Sell Trade Setup

Entry

  • The Parabolic Stop and Reverse indicator should start printing dots above price action indicating a bearish mid-term trend
  • The Forex Trend Signals indicator should change to red indicating a bearish mid-term trend
  • These bearish reversal signals should be somewhat aligned
  • Enter a sell order on the confluence of the above conditions

Stop Loss

  • Place the stop loss at the resistance level above the entry candle

Exit

  • Close the trade as soon as the Parabolic Stop and Reverse indicator prints dots below the price action indicating the start of a bullish mid-term trend
  • Close the trade as soon as the Forex Trend Signals indicator changes to lime indicating the start of a bearish mid-term trend

PSAR Trend Forex Trading Strategy 3

PSAR Trend Forex Trading Strategy 4

Conclusion

This strategy is an excellent trend following strategy based on the established trend reversal signals indicated by the Parabolic Stop and Reverse indicator and the Forex Trend Signals indicator. Because these indicators indicate entry points on established trend reversals, the probability of price going the direction of the trade is high. However, these indicators are still considered lagging indicators. This might mean that some entry points are already a bit too late and may reverse quickly. If this does happen, price may reverse too deep before the reversal signals are detected, which may cause the trade to lose. To alleviate this traders must move the stop loss to breakeven as soon as possible, without moving it too early, which may cause the stop loss to be prematurely hit.

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