Double Parabolic SAR Strategy

A double parabolic SAR strategy uses two indicators with different settings. First, a longer-term period shows the trend direction based on the direction of the parabolic SAR. Once the long-term trend direction is determined, trades can be taken on a shorter timeframe, but only in the direction of the longer-term trend. This gives extra confirmation to buy and sell signals when trading currency pairs which can help to improve win rate. I also like to keep an eye on the price action and use other technical indicators for further confirmation on my trades.

What is the Parabolic SAR?

The parabolic stop and reverse (SAR) is a trend following indicator, which is used to effectively identify price reversals on currency pairs. Being able to properly implement the parabolic SAR allows a trader to determine the direction of the trend, spot suitable entry and exit points and assist in placing trailing stops. It is one of the more popular forex trend trading indicators along with the ever-popular moving averages.

I sometimes use the parabolic SAR to decided if I will be looking for long (buy) or short (sell) trades depending on what direction the indicator shows the market is moving. I probably would not use it for entry and exits on its own, because I feel that would give too many false signals. However, some traders would consider buying or selling when the parabolic SAR changes direction. In that instance, I would at least wait for a bar to close to confirm the signal.

How to trade the double parabolic SAR strategy?

The majority of us use at least a few technical indicators for analysing the charts to spot potential trade opportunities. If one indicator is good for spotting signals, then surely two would be better. I agree to some extent, especially when using indicators that do different things. Despite that, even the same indicator used twice with different settings can filter its own trading signals, something that we see with the double parabolic SAR strategy.

We will use 2 parabolic SAR indicators on our charts, one to look for short term trends and the other to look at the bigger picture. Too often I see forex traders focus on one timeframe which often means they can end up on the wrong side of the immediate or overall trend direction. I would usually look to avoid a trade that is not inline with the long-term trend, unless using a forex scalping strategy to get in and out the market as quick as possible.

Buy signal

  • Parabolic SAR (0.02, 0.2) is below price
  • Parabolic SAR (0.04, 0.4) is below price
  • MACD histogram crosses above zero line
  • Bullish price action

In the EUR/USD 1-hour chart below, you can see that the double parabolic SAR is confirming an uptrend. The MACD crossover has happened to the upside and we also have some good bullish price action formations, including hammer candlestick patterns. We could have placed the stop loss just below the PSAR which would have been around 20 pips. The uptrend went on for almost 200 pips which gave this trade a risk to reward potential of 1:10. There was ample opportunity to take profit on the way up and the PSAR could even have been used for a price point to put a trailing stop loss.

Double Parabolic Sar Strategy Buy Signal
Double Parabolic Sar Strategy Buy Signal

Sell signal

  • Parabolic SAR (0.02, 0.2) is above price
  • Parabolic SAR (0.04, 0.4) is above price
  • MACD histogram crosses below zero line
  • Bearish price action

In the EUR/USD 1-hour chart below, you can see that the double parabolic SAR strategy was able to catch a quite significant sell trend. The signal was triggered when both of the PSAR indicators were above the price, indicating a short and long-term downtrend. The MACD crossover again confirmed the bearish momentum. Spinning top candlestick patterns were showing indecision in the market but the bears came out on top as evident by the numerous red engulfing bars. The stop loss could have been placed just above the PSAR price, which would have been around 30 pips or so. That is very good when you consider this downtrend went on for over 470 pips. We could have stayed in the trade all the way up until the MACD indicator crossed over in the opposite direction.

Double Parabolic Sar Strategy Sell Signal
Double Parabolic Sar Strategy Sell Signal

Double parabolic SAR forex strategy Pros & Cons

Pros

  • Can catch some big market trends
  • Can enter trends at the beginning
  • Any currency pair or chart timeframe
  • Easy to understand buy and sell signals
  • Combines well with other indicators
  • PSAR is free to use on most platforms
  • Customisable settings according to your style

Cons

  • You need to time the entry and exit
  • Requires additional confirmation
  • Need sensible money management
  • There will still be false signals

Conclusion: does the double parabolic SAR strategy work?

Yes, trading with two parabolic SAR indicators instead of one can help to filter out some false signals. It gives the user a clear indication of the market direction which means they can catch some big market moves if used correctly. However, it does require you to filter trades and time your entry/exit with additional forms of market analysis. I personally would not take the double parabolic SAR signals blindly.

In order to get the most out of this or any other parabolic SAR trading strategy, you will need to have good forex money management. This can be the difference between a winning and losing system. I like to try and cut losing trades short and let winning trades run. This means I can still come out on top even with a win rate less than 50%. I would want to lock in good trades at break even point and use a trailing stop to maximise the possibilities of good trades.

You can always practice trading forex with the double parabolic SAR strategy on a demo account to see how things go. You can get a free demo account from most forex brokers. They come preloaded with virtual funds so that you can master your forex trading skills without taking any unnecessary risks.

Free Forex Robot