Secret Optimizing Forex indicators : SAR with ADX
In this article we will learn about the secret of optimizing Parabolic SAR forex indicators with ADX indicators.
You may have heard an indicator called Parabolic SAR. Right?
This time, I will try to review trading tricks using Parabolic SAR indicator and combined with an indicator called ADX. Well, without the need for long, we just start.
What is Parabolic SAR?
SAR stands for “stop and reverse” and is a trend following indicator designed to recognize “turning points” in price movements.
Parabolic SAR will :
- Recognize trends
- Entry and exit strategies
- Trailing stop
When trends tend to rise, these points are under price movements. Conversely, when the trend tends to fall, these points are above price movements. These points follow price movements until at some point the trend starts to change.
When a trend is almost over, parabolic SAR usually moves steadily close to zero until the price touches the Parabolic SAR indicator point. Then the Parabolic SAR indicator point starts to form on the other side of the price movement. That is the initial indication that prices will likely change direction.
The Rules of Paraboc indicator
Rule 1 is when Parabolic SAR indicator starts to form below the price. This is an early indication that prices will likely reverse.
Rule 2 is when Parabolic SAR indicator starts to follow an upward movement.
The example image below is the opposite of the example above. When the price was up, then the direction changed to go down.
We can also use Parabolic SAR indicator as a trailing stop, which is by moving the SL level above the last Parabolic SAR indicator point that appears (if the price drops) or below the last Parabolic SAR indicator point that appears (if the price rises).
Combine SAR with other indicators
However, remember that in principle the SAR function is to identify trends and identify possible changes in price direction.
We recommend that you do not combine Parabolic SAR indicator with other trend direction indicators (for example: MA, Bollinger Band, etc.), because it will only give the same output, namely the direction of the trend. Whereas with the intention of combining indicators is to look for signal confirmation.
You can combine Parabolic SAR indicators with Average Directional Index (ADX). This indicator can measure whether a trend is strong or weak. If the ADX reading shows that the trend is weak then prices tend to move sideways.
Then how to combine SAR with ADX?
But be careful. If the ADX reading reaches 50 or more, there is a possibility that the price will stop rallying, even there is a possibility that it will change direction. So be careful if the ADX reading becomes too strong.
In the following figure, ADX looks below 25. This means that the trend is fairly weak and there is a considerable risk if we force it to open a position with ADX and Parabolic SAR indicator . Note that prices move ranging and in this condition it is not recommended to open a position based on Parabolic SAR indicator .
In the next picture I will give an example where ADX is above 25. Note that the market is moving trending and this is a good condition for trading using Parabolic SAR indicator .
If you want to try using this system, then I suggest starting with the default settings for Parabolic SAR indicator and ADX. I also suggested to try it in a rather long period of time. If using backtest, it is recommended to use data for at least 1 or 2 years.
Good luck. 🙂