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Are you looking for a way to capitalize on short-term scalping opportunities in the market? If so, then you should definitely consider implementing the PSAR Scalping Strategy, which uses the Parabolic SAR Indicator to spot these potential trades.
What is a PSAR Scalping Strategy? And what is the Parabolic SAR Indicator? In this article we discuss and explain both. Implemented with precision, such a strategy has the potential to yield high profits.
While the Parabolic SAR indicator may be a great tool, all traders should know that relying on it alone won't cut it when creating scalping strategies. However, experienced traders can take advantage of this comprehensive tool and use its features to combine with other indicators for maximum performance in tactical trading.
With just a few simple steps and some practice, you'll be able to capitalize on those quick profit possibilities in no time. However, do remember that no strategy is fool proof and there are always risks. So, practicing risk management is always recommended.
Read on to learn more about how this effective Parabolic SAR Indicator works.
What Is Scalping?
Scalping is a great trading style for those looking to pursue quick, small profits from lots of trades ‒ if managed correctly. For scalpers the aim is to make little gains here and there that eventually accumulate over time; however an exit strategy must be put in place as one big loss can easily wipe out any earlier earnings. Scalpers typically accept small returns per trade due to scalping’s speedy nature and employ low risk-to-reward ratios (1:1 or less). So if you're after fast but steady gains, this could just be a great approach.
What is a PSAR Strategy?
PSAR Strategy is a useful approach for any savvy trader looking to capitalize on market trends. This strategy can identify price movements, as well as forecast potential changes in the trend – giving you a critical edge so you can place your trades on time to take advantage of optimal prices and exit quickly.
A potentially rewarding PSAR scalping strategy takes advantage of the Parabolic SAR indicator in combination with other indicators. It is suggested that for the best results to not use the PSAR indicator by itself. The pros and cons of using this indicator are listed below…
What is the Parabolic SAR Indicator?
The parabolic SAR indicator is an incredibly useful tool for traders looking to get a quick snapshot of the direction and potential reversal points of asset prices. Developed in 1978 by J Welles Wilder Jr., creator of the relative strength index (RSI), this "stop and reverse" system makes it easy to identify changes in market trends with just one glance!
With the Parabolic SAR formula, our indicator plots out stop and reverse levels on your chart to help you make more informed trading decisions. The formula uses the recent extreme price (EP) with an acceleration factor (AF) to determine where the indicator’s dots will appear.
Parabolic SAR Formula:
Bullish formula: PSAR = Prior PSAR + Prior AF (Prior EP – Prior PSAR)
Bearish formula: PSAR = Prior PSAR – Prior AF (Prior PSAR – Prior EP)
Thankfully, you don’t need to dust off your high school algebra in order to trade with the PSAR indicator. Whichever trading platform you choose to use, whether it’s MT4, MT5 or cTrader, they do the math for you. All you need to do is select the indicator you want to use and it appears on your chart.
The PSAR indicator may be easy to use, but its lagging nature can make it tricky when trying to differentiate between turning points in the market and reversals. Will this simple tool offer you a profitable edge? The key factor that will determine whether or not you profit off your trades using PSAR? Adjusting its settings ‒ so make sure you stay on top of them as often as possible.
Parabolic SAR Indicator Basics:
- Parabolic curve below the price = bullish indication.
- Parabolic curve above the price = bearish indication.
- This indicator is made for trending markets and not so useful for ranging markets.
- When there is a wider gap between the dotted line (the parabolic curve) and the price, that means there is momentum.
- It alerts traders to potential changes in direction.
- It can be used to predict when to stop and reverse trades.
- When the trend loses momentum, the parabolic curve converges to the price.
In the chart above you can see the orange dotted line which is the parabolic curve. Toward the left of the chart you can see a greater gap between the dotted line and the price line. This indicates momentum. In the center the price is ranging and towards the right the parabolic curve is seen below the price which indicates a bullish trend.
Where the price and the parabolic curve meet, is when they are converging and that means the market is losing momentum. This may indicate an ideal time to exit.
When trading, it's possible to use this indicator as a foundation for creating a stop and reverse system where you switch from shorting investments to going long without having to make any cash transactions in between. However, we don't recommend doing so.
How Do You Use the Parabolic SAR Indicator?
When trading, it's possible to use this indicator as a foundation for creating a stop and reverse system where you switch from shorting to going long. Further down we offer two PSAR Scalping Strategies that show how to use this indicator.
How Does the Parabolic SAR Indicator Benefit a PSAR Scalping Strategy?
The PSAR indicator is a great indicator for scalping because it offers an easy way to keep track of where you should place your stop level in order to stay in the market. As long as the trend continues, this powerful tool will move closer and closer towards it - but if things start going against you, don't worry! Wilder's rules make trading with a Parabolic SAR indicator stress-free: no complicated instructions needed here.
Wilder's PSAR strategy is all about spotting trending prices. When you see the dots below current market price, it could be an indication of a potential uptrend; and when they're above, brace yourself for what might come – a downtrend! The best way to seize this momentum is by entering into positions that penetrate these SAR points – buy if the price surpasses those lines going up and sell with them heading down. Oh yeah... Make sure to stop or swap your position once the markets cross back over again!
How Do You Combine the Parabolic SAR Indicator with Other Indicators?
If you're looking for a great way to identify trend reversals and maximize your trading potential, consider combining the Parabolic SAR indicator with two moving averages. Combining a 40-period MA with a faster 20-period MA is ideal since it helps verify that any signal from the Parabolic SAR indicator accurately reflects an upcoming reversal.
Another way to better your odds at a successful PSAR scalping strategy is by using supporting indicators like the Average Directional Moving Index (AX). The ADX is perfect for confirming that you're in an active trend and not just riding sideways. Keep in mind that the Parabolic SAR won't be of much help when it comes to markets with minimal fluctuation!
Pros and Cons of of a PSAR Strategy using the Parabolic SAR Indicator
The PSAR Indicator is one of the most popular indicators among traders worldwide, as it provides an effective system to predict market movements. It is indeed a very advantageous indicator, however there are some drawbacks associated with incorporating a PSAR strategy.
Advantages
Taking advantage of a PSAR strategy using the parabolic SAR indicator could help you pinpoint trend changes and strengthen your trades. With this powerful tool, not only can you spot market movements with clarity but also protect yourself from any major losses by setting stop-loss points close to real-time prices.
Disadvantages
Although the Parabolic SAR Indicator is useful in establishing stop loss and take profit levels, its lack of information on volume as well as a clear entry point can make it hard to read when markets are in consolidation or trending. As such, this indicator should be used with experience and combined with other techniques for optimal results.
Creating PSAR Scalping Strategies
Due to the PSAR Indicator’s nature as a momentum indicator, its stop and reverse idea doesn’t work in ranging markets. This is why a PSAR scalping strategy based solely on a PSAR indicator isn’t recommended. Below we explain the reasons why this indicator may not be ideal for scalping. Further down we will offer some tips in the form of two strategies to help you make the most of scalping using the PSAR indicator in a ‘non-traditional’ way.
Reasons why the PSAR indicator should not be used for scalping:
- Parabolic SAR indicator is a great tool for trending markets, but it's not ideal if you're looking to scalp.
- When prices are in flux, scalping can be a great way to capitalize on short-term gains. But if you're expecting the market to stay relatively range-bound, then PSAR may not be your best bet; this trend indicator works better for longer periods of growth and decline.
Professional traders understand the importance of scalping during sideways markets. By taking advantage of low price volatility, they aim to capitalize on small movements and increase their chances for success.
In trending markets, prices can move significantly over long periods of time - and that's where pro traders use momentum strategies to maximize their opportunities for success. These types of trades are designed to capture these substantial moves in the market.
Maximizing your winnings in the market isn't all luck! Research suggests that trends, which occur roughly 30% of the time, can be an opportunity for savvy traders to capitalize on big moves. Staying aware and implementing strategies designed for catching these moments ‒ and using the right indicators ‒ is a great way to bolster success potential.
Having said all that, the PSAR indicator can be used in a ‘non-traditional’ way in a PSAR scalping strategy by adding other technical aspects and indicators into the mix.
PSAR Indicator Trading Strategy Rules:
- The below trading guidelines are based on sound price action logic, although statistical testing has not been performed.
- The trader must use their own judgment to assess the market conditions to determine whether the price is trending or ranging at the time of the proposed entrance.
- Before using any trading method, back testing it is always the trader's responsibility and strongly advised.
PSAR Scalping Strategy #1: Scalping With The PSAR Indicator In a Range
Now, let's mix things up a bit! To make scalping work for us, we're applying our PSAR indicator in unique ways. By adapting it to the process of mean reversion, this momentum-based tool can give range trading an extra edge.
Mean reversion = range
Momentum = trend
- When you have a range, the price fluctuates and eventually reverts back to its average value. It's like taking two steps backward before moving forward ‒ that's why there's no long-term momentum in this situation.
- Avoid buying at the market's peak (resistance level) and selling at its lowest (support level) points! In a mean-reversion environment, that decision would most likely lead to losses.
- Make sure to capitalize on market turns and potentially maximize profits by buying low at the support levels, then selling high when prices reach resistance.
Here we have the EUR/USD one minute chart and we have three points. The range is established after the red vertical line and that’s when you can start to apply the trading rules.
Long entry rules:
- Wait until the market is in a range (after the red vertical line).
- Buy in at the first green candle after the price moves to the low SAR.
Long exit rules:
- Sell as soon as the price reaches the previous or the current high SAR where the orange dots meet the price line (top horizontal red line).
*Remember to use stop-loss orders
Short entry rules:
- Wait until the market is in a range (right after the red vertical line).
- Sell the first red candle after the price moves to the high SAR (first red arrow from the left).
Short exit rules:
- Buy as the price reaches the previous or the current low SAR value.
- One of the only certainties in the market is that eventually the market will break out of the range. So you need to have these protective stop-loss orders in place so as to not experience unnecessary losses.
PSAR Scalping Strategy #2: Momentum Trading
Momentum trading using the parabolic SAR indicator is a great way to capture profits in trending markets. When prices are rallying, we can look for buy signals; conversely when they’re falling short, sell opportunities pop up. Never go against this momentum – it could cost you!
In this PSAR strategy we are not using the stop and reverse feature of the SAR indicator as it is not reliable for scalping. Instead we are using a moving average indicator to determine the direction of the trend.
Long entry rules:
- Wait until price trades move above the moving average and the moving average indicator (blue line) is moving up.
- Buy the first close above the high SAR (dotted orange line).
Long exit rules:
- Sell the first close below the low SAR.
- *The Simple Moving Average (SMA) line in this chart is 75 periods. It is suggested you test several SMA lengths to see what works best in your strategy.
Short entry rules:
- Wait until the price trades below the SMA (blue line) and the SMA is moving down.
- Sell the first close below the low SAR.
Short exit rules:
- Buy the first close above the high SAR.
- When trading, it can be beneficial to consider using multiple trades ‒ adding or exiting when certain signals arise. However, protecting yourself with stop-loss orders should always remain a priority!
Conclusion
We hope this blog post gave you a comprehensive overview of the pros and cons of using the PSAR indicator. While it’s not usually ideal for scalping, we showed two strategies to use this tool in more non traditional ways: a Range PSAR Scalping Strategy and a Momentum PSAR Scalping Strategy.
The beauty of trading is that there are numerous ways to create success, so while one isn’t necessarily right or wrong, it’s all about what works best for you. That’s why we suggest testing different strategies out on a demo account first so you can gain comfortable and confident insight before trading live. Whatever your approach is, just make sure you remember to always stay disciplined, patient, and aim for consistency with the techniques and processes you build through practice.
To help assist in the journey, join our Prime Index trading community today for more insights and support from experts in the field.
