Hirose News|August 12, 2013 3:01 PM

Parabolic SAR

We have previously added a Relative Strength Index and Bollinger Bands to the chart to complement the Moving Average.  The final indicator I intend to use is the Parabolic SAR.

The Parabolic SAR was devised by J. Wilder to find possible reversals in price direction.  Again, it is a lagging indicator and can be used to determine entry or exit points as well as acting as a trailing stop loss.

When the price is in an uptrend, the SAR emerges below the price and vice versa for a down trend. In figure 2 you can see the SAR represented by dots (yellow for uptrend and purple for downtrend.
Last week it was looking like the MA on the daily chart (GBPUSD) was going to cross to create a short position.  Indeed it did.  Figure 1 shows the potential crossover.

And Figure 2 below shows (worst case scenario using lower blue arrow) where a potential sell position may have been activated.

What happens next....a sharp reversal and if there was no stop loss in place the next trade would have been a buy as the short MA crossed back above the long MA (worst case scenario higher blue arrow).

Would the SAR have saved us?  Possibly, as you can see it started intonating an uptrend 4 days ago.  The first or second yellow dot could be used for creating a stop loss.

Have a look at the yellow arrows.  These are clear signals of market reversals and next week we will have a look at gathering all the information at creating an actual strategy to test.

Happy trading!

The Hirose Team