Use indicators as trading systems 2020 - Understand Parabolic SAR

Indicators as trading systems 2020: difference between normal indicator & indicative trading system? Understand Parabolic SAR Act now.

Indicators are the basis of market technology. In addition to analyzing the courses, they are among the most popular tools of a technical trader. Technical indicators can either be very simple or complex in their analysis. Some indicators are even referred to as complete trading systems. For example, the Ichimoku Kinko Hyo, which combines several averages, or the MACD indicator, which is known to be a trend-confirming indicator, but in many cases is combined into a trading system.

What is the difference between a normal indicator or an indicative trading system?

A trading system based on indicators not only shows buy signals, but also the appropriate exits. In the following we present an indicator that has it all, because it not only shows the time of purchase, but also includes risk management. It shows the level at which a stop loss would make sense.

But now it is also the case that no stops have to be set when trading binary options. Nevertheless, these levels can be seen as areas that need to be analyzed in detail, and since the early sale of binary options is currently possible, this methodology does not even seem so uninteresting.

Use indicators as trading systems 2020 - Understand Parabolic SAR

The Parabolic Understand SAR

We are talking about the Parabolic SAR indicator. The indicator shows both entry and stop points. Basically, it is a trend-confirming indicator. The special thing about it is that as the trend progresses, it moves closer to the price and the risk of losing the accumulated profits decreases over time.

SAR stands for Stop an Reverse . In its original interpretation by the developer Welles Wilder, the position was to be taken in the other direction each time it was stopped. This means that you are almost constantly on the market. However, as is known, technical indicators have their weaknesses and often generate false signals. Especially indicators that prefer constant positioning should be viewed with caution, because not all phases are trends.

The weakness of the Parabolic SAR is definitely its inability to display sideways phases. The indicator always indicates trends, and so positions can be changed again and again in sideways phases, but these are then stopped too early or end without any notable development of the course "out of the money".

As is so often the case you should therefore use another indicator if you are not able to recognize a sideways phase yourself or the system should be automated as much as possible.

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A trading system with weaknesses

Die Interpretation of the Parabolic SAR works as follows:

  • price moves below the points, trend is down
  • price moves above the points, trend moves up
  • The entry occurs at the first point
  • Stop and reverse occurs at the first reversed point

Furthermore, the trader should ask himself whether he wants to trade long trends or rather trends within the trends. This is necessary for the interpretation of the filter indicator. Should the trader exit or stick to a sideways consolidation because he assumes that it is only a consolidation?

Which filters can reduce the weakness of the trading system?

There are several ways to use a filter. Either you...

  1. analyze the weekly chart or
  2. uses trend strength indicators.

The weekly chart is a way to identify long-term trends, On a longer-term basis, the course direction can be interpreted more reliably. Trend strength indicators such as the RSI (Relative Strength Index) or the momentum belong to the family of oscillators.

The example below shows that trends within a large trend can be confirmed with the RSI. Every time the RSI fluctuated below the 30%, there was a dynamic downward trend. The reason why the relative strength is so weak in this case is that the RSI measures the strength of upward movements in this form. If this strength is weaker than 30% compared to the last 14 days, this is a confirmation of a strong downward trend.

If the trader wants to trade the entire trend, he must be satisfied that he stops or reversal points should start earlier. In this case, a simple moving average based on 50 days would be conceivable as a filter indicator, as shown in the chart above. As long as this acts as resistance and has not been exceeded, the downward trend is still intact and can be traded. A first breakthrough has already taken place. Up to this point, however, the trend would have been very advanced.

Use indicators as trading systems 2020 - Understand Parabolic SAR

Conclusion

It would be advisable to trade binary options, the first variant and trading smaller trends within a large trend, since binary options usually have short terms. If long-term binary options are offered, such as the broker binary.com, the second variant in connection with weekly charts could also be considered.

Use indicators as trading systems 2020 - Understand Parabolic SAR

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