Incorporating indicators can be helpful but it can also be a fateful mistake

One of the most misinterpreted areas of the market is ‘technical analysis’. Technical analysis for the bankers is ‘trendlines’, support & resistance trendlines to be precise.

These trendlines provide clear and precise entry & exit points.

Technical analysis ‘doesn’t’ mean getting a chart up and ‘splattering it’ with 10+ indicators in the hope that one of them will provided the answer for what to do.

In my experience traders who use indicators as their ‘primary’ source of a trade opportunity are unsuccessful in the long term. And this I believe is one of the key reasons why the majority of retail traders are unsuccessful.

Fact: Traders use indicators because they have no real understanding of the market; how it works, what the charts are for, why the currencies go up and down etc.

Using indicators day in day out as your primary ‘trade determinant’ will be fateful!

But there is hope. You can incorporate some indicators as your ‘secondary’ source for a trading opportunity and they can seriously enhance your probability of success.

Let me explain in more detail and specifically with reference to the SAR.

Probability Enhancer – SAR

I’ve been getting a lot of requests lately to explain the Parabolic Stop & Reverse or SAR as it’s named on most of the trading platforms.

This is a simple and easy to understand indicator devised by J. Welles Wilder to find potential reversals in the market price direction of securities or currencies.

Investopedia do a good job of explaining how it works so I’ll leave you to research that on their site: Introduction to the Parabolic SAR but more importantly I want to explain to you how to incorporate this indicator and these principles stand firm for incorporating any indicator into your trading.

Now first of all you need to understand what the indicator is telling you, that’s first and foremost.

Secondly, understand its limitations. The SAR is a great tool to incorporate in ‘trending’ markets. For those that aren’t sure, that’s markets that are moving primarily in one direction.

Using it in ‘choppy sideways’ moving markets could be potentially a fateful mistake as it is widely know that it gives off the wrong signals in these sorts of markets.

So when you are looking at your charts, ask yourself the question – are the currencies trending at the moment?

If they are you are good to go….if not, think again and take it off your charts.

Look for Good Technical Set Ups First – That’s what the bankers do!

The whole foundation for a trading opportunity revolves around solid technical levels and a fundamental driver.

You’ve either got both working for you or at the very least just one…so you’ve got something tangible that you can hang your hat on.

Now from this point we look for possible “Probability Enhancers” to fine tune the trading opportunity.

We’ve got stochastics, currency correlations and stochastics to name but a few. But there’s also 100 other indicators you could possibly incorporate.

This is where the SAR could potentially come into play.

Good technical set up + SAR = higher probability of success

Now once you do have a good set up and you’ve identified the markets are trending, put the SAR on your charts and see what’s going on.

If the SAR dots chime in with major technical levels then you’ve really got a huge potential opportunity.

Check the EURUSD hourly chart below, it was a cracker with the SAR dots chiming in right where the trendline key level is.

Once I’ve identified this technical set up and I can see the SAR coming in at the exact same level my confidence goes through the roof.

In the chart above both the SAR and trendline converge at 1.2510. Awesome set up!

Plus stochastics are over bought so that favours a move lower as well. All I need is the technical level to break and away it goes.

Higher Probability gives you a chance to leverage up

When all the ducks line up you’ve got to smash it and that means leveraging up, if you have the runs on the board.

If you’re in a drawdown phase then it’s just the one trade size, but if you have been having a good run of late then you could potentially increase your trade size to maximum (for your capital mangement system) and this is where you’ll really add some serious cash to your trading account.

You can potentially add 10-15% capital to your account from this one trade.

This is no fluke and yesterday’s GBPJPY order is case in point.

I knew there was going to pressure on the Nikkei after the US equities dropped 1% and the last 30 minutes of trading.

I also knew I had a great Ichibahn Strategy set up on the downside + I also had the SAR coming in at the same level. PERFECT!

So all I had to do was put the order on my trade station, as the market will do the rest for me!

As you can see it sliced straight through the level and the rest they say is history.

Plan, Prepare, but most of all don’t start Over Trading using the SAR

Now one of the dangers of explaining all of this to you is, you read it and think ‘holy cow’ I’ve just found the ‘holy grail’.

Well I’m sorry to say it, but you haven’t. What you have found is a seriously good ‘Probability Enhancer’ that could really fine tune your trade decision process.

It doesn’t mean that every opportunity is going to be a 100% success, but it can potentially give you the confidence to trade better and that’s all I want you to do.

One of the pitfalls that I mentioned at the start of this article is using the SAR as your ‘primary’ source of trade ideas and also in choppy sideways moving markets.

Check this EURUSD chart out below. You can see loads of ‘false signals’ that would have led to a solid loss of capital.

Synopsis on the SAR

So there you have it traders – that’s the Parabolic Stop & Reverse.

I do seriously think this indicator can enhance your trading…if used correctly.

I would only use it on the ‘Hourly’ charts and above (Daily, Weekly) as that’s the timeframe the bankers look at.

Any time frame shorter than that and you’re simply trying to manufacture the opportunity by adjusting the SAR to a shorter time frame.

DONT start using it as your primary source of ‘trade set up’, otherwise you could find yourself hitting drawdown after drawdown ….. and then finally telling me I don’t know what I’m doing!

Incorporating the SAR shouldn’t change anything in your preparation or daily trade routine. Still focus on the trendlines and the fundamental drivers and once you have a good set up drop the SAR indicator onto your chart and see if it ‘enhancers’ the opportunity.

For a full explanation of the indicator and how best to incorporate it go to the Forex Advanced Pro Trader Course>Scalping the Market>Utilising the SAR – Parabolic Stop & Reverse

Try it out on your charts and let me know how you get on.

Brad