The parabolic SAR and MACD indicator can both do a good job when it comes to identifying the direction a currency pair is trending in. The main issue with the parabolic SAR is that it does not take into account the trend momentum, which is why the MACD can compliment it so well. When you combine these popular forex indicators together to form a parabolic SAR and MACD strategy, you can determine the trend direction and time your entry into this trend. If you add some price action analysis and have good forex money management, then the foundations are in place for a solid forex trading strategy.
What is the parabolic SAR?
The parabolic SAR (PSAR) is a trend-following indicator that helps traders gauge the direction of price movement of a currency pair. The PSAR indicator appears in technical charts as a series of dots that are located either above or below candlestick bars. When the PSAR is above the candlestick, it suggests a downtrend. If the PSAR is above the candlestick, it suggests the market is trending up. Some forex traders like to use the PSAR as a trailing stop.
What is the MACD?
The moving average convergence divergence indicator (MACD) is a model that follows the momentum of trends by showing the relationship between two moving averages of the price of a currency pair. When the MACD is above the signal line or zero line, it suggests we are in an uptrend. If the MACD is below, it is a sign that we are in a downtrend. MACD divergence can also be a good way to determine the direction in which the market may be headed.
How to trade the parabolic SAR and MACD strategy?
We will be taking the entry signals from both the PSAR and MACD to help spot buy and sell trades on any currency pair and chart timeframe. I personally prefer to trade the 1-hour charts and above as I think this helps to remove some of the noise from the lower chart timeframes such as the 5-minute and 15-minute charts which can cause a lot of false signals.
I also like to trade major currency pairs such as the EUR/USD and GBP/USD as they usually have plenty of liquidity which can create some good market movements. It also means tighter forex spreads and quick execution speeds, especially when using an ECN broker. IC Markets are my top choice of forex broker when it comes to manual and automated forex trading strategies.
If the parabolic SAR is above the price and the MACD is below the signal line, we will look to take a sell position once we have confirmation from support and resistance levels along with any candlestick patterns. If the parabolic SAR is below the price and MACD is above the signal line, we will be looking for buy trades.
Buy signal
- PSAR is below price
- MACD histogram is above signal line
- Price bouncing from support or breaking resistance
- Bullish price action
You can see from the EUR/USD 1-hour chart below that all conditions for a buy trade have been met. The parabolic SAR is below price and the MACD has crossed above the signal line. We can see that price is moving away from the support level which has held up well. The entry is confirmed with bullish price action including a spinning top candlestick pattern. The stop loss could have been just below the support level which is around 20 pips. That’s not bad when you consider the uptrend carried on for over 740 pips. The PSAR could have been used as a trailing stop and there were additional MACD crossover entries on the way up.
Sell signal
- PSAR is above price
- MACD histogram is below signal line
- Price bouncing from resistance or breaking support
- Bearish price action
You can see in the EUR/USD 1-hour chart below that the conditions for a sell trade were all in place. The parabolic SAR is above the price and the MACD histogram is below the signal line. We have a strong resistance level that has held up multiple times. Price is moving downwards with bearish price action confirming the trade, including a large red engulfing bar. We could have used the PSAR as a stop loss level which would have been an initial 15 pips. This is very tight when you consider this downtrend went on for around 500 pips. There was ample chance to take profits on the way down. If we had used the PSAR as a trailing stop loss then way might have been taken out prematurely around half way down the trend. We cannot catch every pip from every move but there was a re-entry point following on from that with another MACD crossover.
Parabolic SAR and MACD strategy Pros & Cons
Pros
- Catch some big forex trends
- Any currency pair and timeframe
- Easy to identify buy or sell signals
- Gives additional confirmation
- MACD and PSAR indicators are free to use
Cons
- Requires some user initiative
- Need to time the entry and exit
- Can take some time to master
Conclusion: does the parabolic SAR and MACD strategy work?
Yes, as you can see from the trade examples that I have shown here, trading forex with the parabolic SAR and MACD strategy can catch some big market trends. However, just like any forex strategy, it will not work every time. That is why sensible forex money management is so important. I would be looking to cut my losses short as false signals are inevitable. I would want to lock on good trades at break even point and let them run for maximum potential.
If you like the look of the MACD and parabolic SAR strategy, then you could always give it a try on a forex demo account which you can get free from the majority of forex brokers. This can be a great way to practice your forex strategies using virtual funds so that you can build up your confidence without taking any risk.
Self-confessed Forex Geek spending my days researching and testing everything forex related. I have many years of experience in the forex industry having reviewed thousands of forex robots, brokers, strategies, courses and more. I share my knowledge with you for free to help you learn more about the crazy world of forex trading! Read more about me.
