Understanding Parabolic SAR Indicator

Parabolic SAR is a trend following indicator that is often used as a trailing stop. Parabolic SAR indicator was introduced in 1978 by J. Welles Wilder, Jr. in his famous book, “New Concepts in Technical Trading Systems.”The term Parabolic is used because when this indicator is applied to the chart it forms strings of dots that look like a parabola, a shape you might remember from high school algebra.

The term SAR on the other hand simply means Stop and Reverse because when reached by price action, this indicator switches direction and reverses to the other direction. So a Parabolic SAR is used to identify entry and exit points based on a trailing stop that reverses when reached by the price action.

Before we talk about how to use Parabolic SAR indicator in trading, we need to understand a few terms that are often used when using Parabolic SAR. High Point (HP)is the high of a candle that has a high higher than the highs of the candles adjacent to it on its left and right. In the same manner, Low Point (LP) is the low of a candle that is lower than the lows of the two adjacent candles on the left and right. Similarly, a Significant Point (SP) is the highest price during a long trade and the lowest price during a short trade.

Another very important term that you need to understand while using Parabolic SAR is the Acceleration Factor (AF). At the beginning of every trade, Parabolic SAR dots move with increasing rate dependent on the AF. AF has the default value of 0.02 and 0.2. What this means is that AF starts from 0.02 and ends up at 0.2. At the formation of each HP or LP, AF is incremented by 0.02. AF stops incrementing when it reaches 0.2 level. These HP, LP, SP and AF are used in calculating Parabolic SAR values.

The default settings are 0.02 increment and the max level of 0.2 for Parabolic SAR. If you decrease the increment to a lesser level like 0.01, there will be lesser reversals for Parabolic SAR. On the other hand, if you increase the increment settings to say 0.03, there will be more reversals and whipsaw. Calculating the value of Parabolic SAR is done automatically by the charting software. You just need to keep the above basic facts when trading with Parabolic SAR. Just keep this fact in mind that the first Parabolic SAR value is calculated from the SP from the previous trade.

Using Parabolic SAR Indicator for Entry and Exit

In this article, we will discuss how to use the Parabolic SAR indicator for entry and exit in actual trading. When the dots of the Parabolic SAR are located below the price, it means the trend is up and the price momentum is also in an upward direction and will stay like that till the price action hits Parabolic SAR. This is also a signal for a long trade.

When the price action is below the dots of the Parabolic SAR, it means that the trend is down and the price momentum is also in a downward direction and will stay like that till price action hits the Parabolic SAR. This is also a signal for a short trade. The dots will move down as a trailing stop.

The advantages of using Parabolic SAR indicator is that when a trade is entered the initial distance between the Parabolic SAR and price and the slow movement of the dots gives enough space for the price action to move favorably. Once the trend gets well established, the dots accelerate and the trailing stop gets very close to the price action locking in the profit.

Parabolic SAR is always used in conjunction with other indicators. However keep this in mind it works in a trending market. If you use it in a sideways market, it will generate many signals and cause whipsaw. When the price hits the parabolic arc the indicator reverses to the other side of price to form a new series of dots on the other side of price action, it is taken as an entry signal. Before entering into a trade, make sure you are trading in the direction of the trend.

For example, you can use 10 Period SMA and 50 Period SMA to confirm the direction of the trend. When 10 Period SMA is above 50 Period SMA, it is a signal that the trend is up. So when the Parabolic SAR changes direction from above the price to below the price, you will go long. In the same manner, when 10 Period SMA is below the 50 Period SMA, the trend is down and you will go short when the Parabolic SAR changes direction from below the price to above. Parabolic SAR is also often used as a trailing stop.

Deciding when to exit is often difficult for a trader. Letting Parabolic SAR do that for you makes trading much easier. A Simple System based on using Parabolic SAR for entry and exit can be a 50 Period SMA. When price action crosses above 50 Period SMA, it means the trend is up. When Parabolic SAR is above the price action, it means the price is retracing. As soon the Parabolic SAR reverses direction and goes below the price action, enter into a long trade. When Parabolic SAR changes from below to above the price, exit the trade.

Scaling In and Out of a Position Gives You the Needed Flexibility to Manage a Forex Trade

The ideal way to enter into a trade is to do it gradually. This is also known as Scaling In A Position. In the same manner, it is best to exit the trade in a gradual manner. This is also known as Scaling Out Of A Position. Trying to figure out the perfect entry and exit is only going to make you more confused and hinder you in making your trading decisions. There is no perfect entry or exit. You will never be able to catch the top or the bottom at the precise moment.
Let’s make it clear with an example. Suppose, you are trading EUR/USD. If you have been following the currency market, EUR/USD is hovering at its lowest level of 1.2700 in 16 months in the last few days. It can fall further if ECB decides on further interest rate cuts. Your fundamental and technical analysis is strongly suggesting that EUR/USD pair will go down more.
So, you decide to go short. One approach is to enter into a short position with 1 standard lot single entry straight away and say put a stop loss of 50 pips at 1.2750. If instead of EUR/USD rate going down, suppose, the rate starts climbing and climbs more than 50 pips to say 1.2760, your stop loss will be hit and you will be out of the trade.
Suppose, EUR/USD rate climbs up by 100 pips to 1.2800 then again starts dropping and drops by more than 200 pips. You are not happy as you made a wrong entry decision. If you had entered into a trade gradually, you would have been still in the trade. So, the correct and much better approach is to enter the market gradually.
This is how you should do it. You plan to trade a total lot size of 1, break this lot into 5 small lots of 0.2 lot each. First enter into a short trade at 1.2700 with 0.2 lot and stop loss of 50 pips at 1.2750. When you hit the stop loss and if your technical analysis is still strongly suggesting that EUR/USD will eventually fall, you should enter another 0.2 at 1.2760 with stop loss of 50 pips at 1.2810.
When price action reaches 1.2800 and starts dropping enter another 0.2 lot at 1.2750 and then another at 1.2700 and the last 0.2 lot at 1.2650. This is also known as Scaling in technical terms. With experience you will see that this scaling in and out of a position is a much better approach and will give you the flexibility to manage your trade in a much better manner no matter in which direction the market moves.

7 Mistakes That Forex Traders Make: How to Stop Losing Money

Forex trading is a great way to make good money by leveraging your capital against the small currency movements which happen every day. Unfortunately it can sometimes get a bad name due to all of the systems and courses online which promise to make you rich overnight.

The good news is that you can still make money from trading currencies, but there is a steep learning curve and plenty of mistakes that you will need to avoid. To get you started, here are the worst ones:

Greed

Greed can cause you to forget about the rules you have put in place that might be telling you to get out of a position. Holding on to make sure you get the maximum profit in a profitable trade is important, but getting greedy and holding on too long can lead to sudden losses.

Impatience

If you have a good understanding of the market and your strategy you should be able to pick positions well, but sometimes opportunities just don’t seem to be happening – staying disciplined and patient in these times will prevent you from entering positions which you know you should stay out of. Instead, spend some time reading the news, check a currency converter periodically or just blow off some steam and come back later to see if things pick up.

Chasing Losses

A good currency trader makes more money from the wins that he loses on the losses, but sometimes a string of losses will happen; guaranteed. If you get a string of losses it is easy to lose your head and start taking risks in an attempt to win it all back – if you feel the urge to do this, take a couple of days off, analyse your losing trades and come back prepared to trade better than before.

Lack Of Focus

There are all sorts of different systems out there which tell you wonderful and clever ways to make your Forex trading easy – but it never will be easy. Try to avoid overload on these systems, pick a simple strategy and put in the hard work to fully understand what you are doing, this focus will make you a better trader in the long run.

Looking For Shortcuts

This is kind of similar to the point above, but possibly an even more dangerous mind set. If you are looking for shortcuts you presumably believe there is an easy way to succeed, and until you accept that this isn’t the case, you might as well be gambling.

Fear

Fear isn’t a common problem, but it does happen; if you find a good spot, and all the signals are saying go for it, but you hesitate and enter a position late, you are letting fear chip into your already narrow margins.

Gambling

You probably think that you are not doing this; all Forex gamblers do. Each and every position you close, win or lose, you should be able to justify to yourself exactly why it was the right move. If you ever answer something along the lines of “I just had a feeling” – like it or not, you are gambling.

How to Apply the Fibonacci Retracement Tool Correctly?

The Fibonacci retracement tool is one of those tools in forex that a forex trader simply cannot do without. This is because in the financial markets, prices do not move in a continuous straight line, but in a convoluted twist of pullbacks and advances. Whenever the price action of a currency has moved substantially in a particular direction due to a very strong trend, those traders who were able to get in early would at some point, decide to take some profits from their trades. This will place the gaining currency on offer and will lead to a supply excess over demand for that currency at that particular time, leading to price pullbacks.

A dilemma has always been how to determine with some degree of accuracy, how far the price action of the currency will pull back before resuming the move in the direction of the previous trend. This renewed move in the previous trend occurs because traders now perceive the currency in question to be at bargain levels, low enough to be able to still grind out some advance movement for profit.

This is where the Fibonacci retracement calculator comes into play. Traders can use it to identify the possible levels to which prices will pull back, and there are five levels to choose from.

In this piece, we will deal with how to correctly apply the Fibonacci retracement tool to a forex chart, as this is one area where traders make mistakes when using the Fibo tools.

Step 1

The first step is to open an appropriate time frame chart. The Fibo tool is used to detect levels at which trend retracements will end. Trends can only be correctly determined from longer term charts such as the daily chart. So you can open a daily chart as the first step.

Step 2

Identify the swing high and the swing low for the forex chart. The swing high is the highest point the price action has reached for the time period in view. The reverse is also true for the swing low.

EUR/USD Rises on Easing European Borrowing Costs

EUR/USD climbed as solid eurozone sovereign debt sales and signs of Greece moving closer to a vital debt-swap deal eased concerns and renewed confidence over Europe’s refinancing capability. Spain and France sold bonds at lower yields yesterday and today Greece and its private bondholders will resume debt-swap talks to overcome differences on interest payments. Currency strategist at Bank of New Zealand, Mike Jones said “Given that the European debt markets are the focus at the moment, positive signs emerging there have helped sooth any investor nerves. The market really focused in on the negative headlines rather than the arguably slightly firmer details of that employment number”.

Adding further to the positive mood last night were comments from European Central Bank. ECB said “Against a background of heightened uncertainty and continued stresses in financial markets, the latest survey indicators suggest that, while global growth has been moderating in recent months, some tentative signs of stabilization appear to be emerging. Inflationary dynamics remain contained in advanced economies. In emerging economies, inflation rates have lately experienced a modest decline, although underlying pressures persist” in its monthly report. After the report released, we saw short-covering rally in EUR/USD as macro funds reportedly were reducing their EUR shorts.

The recent price action shows that the market participants who have been extremely bearish are taking their profits and these transactions are pushing EUR/USD higher. Analysts at Barclays Capital said “Market uncertainty has declined substantially in the past few days, with various implied volatility measures across assets falling to levels last seen in late July/early August 2011. Better economic data, progress in the Greek negotiations and successful peripheral European bond auctions have bolstered market sentiment for the time being”. Currently EUR/USD is trying to pass 1.2970 resistance and if Greece reaches an agreement today, there is every chance the pair will reach 1.3050 levels. It is very important to bring the country’s debt down to a sustainable level in order to avoid a default. Investors’ focus will be on U.S. Existing Home Sales data on the last trading day of the week. Any bad news from the eurozone may trigger selling pressure and drag the euro lower.

GBP/USD Forex Strategy That is Very Simple and Makes 20 Pips Daily Using Pending Orders

GBP/USD is one of the major pairs that gets heavily traded. GBP/USD pair is also known as the Cable. GBP/USD pair is affected by the interest rate differential between the Bank of England (BoE) and the Federal Reserve (FED). GBP/USD pair tends to have a positive correlation with EUR/USD and a negative correlation with USD/CHF. For example, a few days back this pair was trading in tandem with the EUR/USD pair.

Many traders trade GBP/USD and EUR/USD. They need to keep the positive correlation between the two currency pairs in view when trading both these pairs together. There are many strategies to trade the GBP/USD pair. Some are heavily based on the London Market Open as this pair normally starts trading in a range a few hours before the London Market open and tends to make a breakout after the London market open.

However, this is a very simple GBP/USD forex strategy that will not make you rich. It can only make 20 pips in day. But the good thing about this strategy is that it does not entail doing any complicated fundamental analysis or technical analysis.

The first thing that you need to do while trading with this strategy is to note the difference between your terminal time and the GMT. You should know the difference between your terminal time and the GMT. This strategy uses GBP/USD 15 Minute Chart.

Daily open the GBP/USD 15 Minute Chart after or before 0.15 GMT. Note the closing price of the candle that starts at 0.15 GMT and closes at 0.300 GMT. This closing price is your base price.

Now, place two pending orders. One Pending Buy Stop Order 50 pips above the base price and another Pending Sell Stop Order 50 pips below the base price. Take profit for both orders will also be 20 pips and the stop loss for both the orders will also be 20 pips. So the risk/reward ratio of both the trades will be 1:1.

You will find at least one pending order getting opened daily. Delete the other pending order that didn’t get opened. If none of the orders get opened in the next 24 hours delete them the next day before entering two new pending orders.

This is it. There is no complicated technical analysis involved. Practice this GBP/USD forex strategy on your demo account and note the win rate. If you are in a time zone where you can easily open the GBP/USD 15 minute chart at 0.15 GMT, you will find it to be a very simple way to make 20 pips daily. You can also automate this strategy with an Expert Advisor.

Dealing with Your Forex Losses

This is a guest post by Elizabeth Goldman
There’s no denying that forex trading is an exciting way to make money. You can get a return on your investment in a matter of minutes if the market goes your way. It is inevitable however, that you will take some losses, but if managed correctly they can form part of a successful strategy. Here, we will look at different methods for dealing with losses.
Control Your Emotions
Lack of emotional control and mental discipline is the main cause of failure among online traders. Lots of accounts are wiped out early because traders act like scared animals in the highly charged atmosphere of the markets. Many more won’t reach a stage where understanding statistics and economic data can help produce better profits. Controlling your emotions, therefore, is an important part of managing losses.
To successfully trade forex, you need to isolate emotions while dealing with the markets. Markets move by emotions but logic is needed to analyze those movements correctly. You need to step back and look at the bigger picture. Study the figures, plot charts and only move when the time is right. Don’t be tempted to rush in.
Avoid Minor Currencies
Stick to the major currencies when trading forex. Smaller currencies are riskier because they fluctuate more than larger, more stable currencies. Avoid potential losses and trade the American dollar rather than the Norwegian Krone. Remember that smaller currencies will also be more expensive to buy because they are illiquid and are traded in lower volumes.
Trade with a Stop-Loss Limit Order
Trading with a stop-loss order will help prevent large forex losses. This will tell your broker to sell a currency when it reaches a certain price e.g. setting a stop-loss order for 10% below the price you paid for a Euro order will limit your loss to 10%.
Use a Take-Profit Order
Take-profit orders are used by currency traders to lock in profits should the currency move in their favor. It specifies the exact rate or number of pips from their current position to where they can close out for a profit.
Trade with a Plan
Do not rush in. Start by examining charts which will give you more information about the currencies you want to trade. Look at the 5 second, 1 hour, and 1 day charts to understand how a currency might move in a trading session. Technical and fundamental analysis are also worth looking at to help look for possible long-term trends.
Avoid Trading Lots of Pairs
Trading lots of currencies is asking for trouble. You will spend too much time looking at charts and not enough time tracking your investments. Keep it simple and focus on a few pairs. More currencies increases the risk as there’s a chance one will drag all your investments down.
Notice Trends
If you notice a downward trend early on in your trading, cut your losses and get out. Do not continue losing money. A stop-loss order will help in these situations.
Keep Records
It is important to keep a record of losses to be always updated with a currency’s development and avoid any future mistakes. Keep a notebook specifically for forex trading and make a chart with the following titles:
Trading date
Beginning balance
Number of trades
Pairs traded
Strategies used
Ending balance
Forex trading losses

Vital Components of a Comprehensive Trading Plan

You must have heard several times that it is important to have a trading plan and stick to it. Not having a trading plan is like an invitation for failure as a trader. What is meant by building a trading plan? Here are some broad points to consider.
The Importance of a Trading Plan
Trading plan is nothing but a checklist. You refer to it before taking a trade. When in a trade you refer to it to make sure that you take a decision according to a plan. Checklist also helps you to stay away from trades which are low probability set ups. The whole idea behind the trading plan is to keep emotions away and take decisions logically.
Stay Away from Bad Trades
The first aspect of the plan should be an affirmation to take only those set ups which are in accordance to your trading strategy and that you will not indulge in overtrading or revenge trading. This will allow you to stay away from bad set ups. If you are a price action trader and take only daily or weekly set ups, you can read the affirmation daily till it becomes your second nature not to look at lower time frame and study only daily and weekly charts.

Three Reasons Why the Euro is Going Back to 1.45

At the time of this writing — February 2012 — the Euro is trading at around 1.31. Though it may seem unlikely now, here are three reasons to believe EURUSD is headed back to 1.45 in the years to come.
Euro Bulls are Defending 1.28. As the monthly chart below illustrates, 1.28 has historically been a support/resistance zone — meaning a focal point where strong buyers/sellers capable of pushing the market step in. On top of that, technical analysts will observe that it is around the 38.2% retracement level of the big move up from the Euro’s inception in 2001 to its 2008 highs past 1.60 while also being around where the 200 month exponential moving average is. The fact that these technical indicators are all finding themselves in roughly the same price zone tells us that there is a “price wall” of sorts; it will be tough for sellers to push through this zone, as those who have been short sellers for a while will look to take profits, while speculative buyers will feel comfortable jumping in here.

The Dollar Woes Are Still There. While the problems with the Eurozone were a focal point of the global economy in 2011, it’s worth noting that the problems with the dollar are still there and are growing worse. Specifically, the US economy is still running both budget and trade deficits (key factors, as we note in our forex course), has persistent unemployment and rising food prices, and is experiencing on continued increases in the money supply. To put it simply: while the Euro has problems, so does the dollar — and I’d argue the dollar’s problems are larger in the long run, as the US economy bears a greater debt burden. This may help explain why in spite of all the hooplah about the demise of the Euro, the EURUSD exchange rate was barely able to break below 1.30 in 2011.
The Trend is Still Up. Last but certainly not least is a casual observation of the trend: as can be seen in the chart above, a 45 degree trendline can be drawn from the lows in 2001 to where we are now. As forex educator and coach Peter Bain reminds us, the trend is your friend: it’s advantageous to trade in the direction of the trend that is clear and present.
For these reasons, I think it is likely that the EURUSD exchange rate will go higher, re-visiting 1.45 at least and possibly going to new highs.