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One of simple but profitable trading system that traders often use is with the Parabolic SAR (PSAR). PSAR is an indicator that is available in the list of MT4 indicators that we have. This indicator includes the types of indicator categories that are visible on the main screen and is often used as a reference for trend reversals. SAR stands for Stop and Reverse or means stop and turn.
PSAR itself looks like dots both above and below the candlestick. This indicator can function as a direction for the current trend and as a trend reversal indicator. Therefore, PSAR is often used by traders as strength indicator of a trend that is happening in the forex market.
Simple PSAR display, helps traders more easily identify price movements. For more details, we can see the following picture.
Display of PSAR on the Chart
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As seen in the picture, PSAR is always being the “satellite” of the candlestick. When the candlestick touches the PSAR, the PSAR will move in the opposite direction, indicating that there will be a change in trend. PSAR itself is in the same group as Bollinger Bands and belongs to the trend indicator group. Trend indicator is a collection of indicators that are leading indicators which provide information on the possibility of price movements of a currency pair in the future.
In terms of settings, the display parameter settings from PSAR are also fairly simple. There are only two parameters that we can set, namely the step and the maximum. Step is the closest PSAR value with a candlestick that can still be tolerated before reversing direction, while the maximum is the farthest PSAR value that occurs when first reversing direction.
Display of PSAR Parameters
We do not need to replace the existing parameters because it is enough to be a reference in further analysis. After we set the indicator and turn it to the main screen, we will now start simple but profitable trading using this indicator. This forex trading system can be consistent profit if you obey the trading rules as follows.
How to trade with PSAR?
As explained earlier, forex trading system using PSAR is quite easy. The first way we can do is to entry the opposite order to the appearance of the PSAR dot. If the PSAR dot below the candlestick, it means we can buy. If we see the PSAR dot appears above the candlestick, it means we can do sell orders.
The second method, using the first method is added by considering the direction and tendency of PSAR dots. If the PSAR appears below the candlestick and the direction tends to go up, then a bullish bias will still occur for the currency pair. Conversely, if the PSAR dots drop further and then PSAR appears above the candlestick, it means the trend is still bearish and possibly will continue for some time to come.
Price Direction and Trend Change Area
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Note the picture above, buy and sell entries can be done when there is a change in the position of the PSAR dot (blue circles) and the trend direction can be seen clearly (blue arrows). Entry is done when the point has reversed position, not before or still in the process of approaching the PSAR dot.
Where are SL and TP?
Stop Loss (SL) and Target Profit (TP) can be determined through various approaches. SL is easier, because the PSAR dot itself can be used as SL because of its opposite location. The farther the PSAR dot is, the more SL is installed. There are also other approaches, for example with the help of resistance support or Fibonacci levels.
As for TP, it can be done with the same approach. TP can be set when the candlestick touches the PSAR dot after the trend occurs. In addition, it can also be done with a support and Fibonacci support approach. As long as PSAR has not been touched, there is still potential for profit as long as the trend has not changed.
SL can also continue to slide following the PSAR dot so that there is a possibility we will get a positive SL. Positive SL occurs due to prices that continue to rise beyond the price of opening orders and PSAR also continues to rise above the price of opening orders. When that happens, we definitely get the profit, just waiting for whether to get a minimum profit when SL is touched or maximum profit when prices continue to rise.
What to Look For When Using PSAR
PSAR is a leading indicator, meaning that this indicator is to provide directions from a currency pair in the future. Therefore, sometimes PSAR dots appear before the trend is formed and as traders we must be careful about that. There are several ways to reduce the impact of incorrect signals using this indicator.
First, by using a candlestick pattern. By looking at the formed candlestick patterns and PSAR, it is expected that more accurate entry orders will be formed. The second way is with the help of lagging indicators, such as Moving Average. When both indicators show the same signal, that’s when we can enter.
Like other indicators, this indicator is also a data set. The more data collected, the higher the level of accuracy. The higher the level of accuracy, this forex trading technique can be a consistent profit. Therefore, the recommended time frame for using this indicator is greater than 1 hour (H1). The bigger the time frame we use, the better it is because more data is collected by the indicator.
PSAR tends to be suitable for trending market conditions, both trending upward (bullish trend) or downward (bearish trend). Why? Because this indicator will continue to follow the movement of the candlestick, whether up or down. And with the distance from the PSAR dotsto the candlestick, this indicator will not easily change its position so that it can give a clearer picture whether the trend will still occur or it has actually changed. Pay attention when the PSAR dot starts to approach the candlestick because a trend change can occur.
Finally, trading system using PSAR included as simple but profitable trading system. This trailing strategy is fairly simple because it is enough to look at the position and trend direction of the PSAR dot and place an order when the point position changes. This indicator is easily seen and identified so even for new traders, it is very suitable and can be used. What needs to be done is to set the strategy correctly, obey the rules of SL and TP and don’t hesitate to cut loss if the PSAR dot changes position. Do not expect to add orders to do averaging because that prices could not go down again.