In today forex faq, we have a question from one of our fellow traders asking me about the PSAR indicator.
Below is the question:
I really want to know how to use the Parabolic SAR to determine entry and stop loss in forex trading and which time frame is better for the use of this indicator. I will be glad to hear from you soonest.
I have actually written a blog post on this indicator before and you can read more about how to use it via the link below
However I must say that it is impossible to trade based on the signal provided by one indicator only. You will have to incorporate other indicators or trend line or S&R to help you improve your entry and increase your winning percentage.
Actually I will strongly recommend that you use the pivot point indicator as a level of S&R to help you with this indicator. What you can do is to wait for the price to hit a major pivot level and then the PSAR dot started to flip to give you an entry in the direction of the repulsion.
This will greatly increase your chance of winning but of course, you must do some back testing with these 2 indicators to check the winning percentage and where is the best place to place our stop loss and target profits to maximize your profits.
As for which time frame is good for this indicator, I will recommend anything higher than or at least on the 15 minutes chart. When you use this indicator on the 5 minutes chart, you will see a ton of false alarm trades causing you to lose money.
If you are a person who have only one hour to trade everyday, you can go for the hourly chart with this indicator.
If you are a person who hardly have anytime to trade, then I will recommend you to use the 4 hour and above chart.
If you are a person who can look at your chart every hour, then you can go for the 15 minutes chart like I do.
This is just my personal opinion, it will even be better if you can add in a trend line to help you identify a better entry point. What you can do now is to try to formulate one strategy with these indicators and do the necessary back testing to see if it works.
You must at least do a back testing for at least 4 months so that you can see if it is profitable in the long run. Do not trade live with this strategy until you manage to get 2 consecutive months of profits in your demo.
What I have shared with you here is just a general strategy and you will have to fine tune it to work well for you.
Do feel free to email me if you have any question