The Forex Parabolic Breakout Trading System

First let’s define the Parabolic SAR and then what it means to US… The Parabolic indicator,

based on Welles Wilder's Parabolic Time/Price Strategy, is used to determine when to stop

and reverse your position (SAR) in a market utilizing time/price-based stops. Once a Parabolic

SAR is reached, the current position is exited and a new position in the opposite direction is

taken.

So that’s the definition of how the Parabolic SAR indicator is commonly used. Our Forex

Parabolic Breakout Trading System is a breakout of the Parabolic SAR (Support And

Resistance) levels and therefore we’re looking to enter anticipating a breakout of those levels.

This will be clearly explained below.

Entering the trade

Now that your chart is all setup I’ll explain to you HOW to trade the Forex Parabolic Breakout System. It really is quite simple… watch the Parabolic SAR indicator and as soon as you see the dots change from top to bottom or bottom to top you must put a stop market entry trade at the same price of the opposite dot. In fact the STOP MARKET ENTRY can be moved with each bar to the SAME price of the previous bar’s dot. Example....if the TOP (red or magenta) dot is

at 1.3044 then the BUY STOP market order would be placed at that price (1.3044). Once the

price is touched, a buy/long position will be open. Conversely if the BOTTOM (blue or cyan)

dot is at, for example, 1.3010 a sell/short stop market order is placed at that same price

(1.3010) and once the price is touched a sell/short position will be open. However, if the price

is NOT touched and the bar closes and a new dot appears at a different price when a new bar

begins then simply move the stop entry order to the same price of the new/current dot. This

is done till the price is touched and the position is open.

See Steps 1, 2, and 3 on this chart:

NOTE: You do NOT have to wait for the dot to change from bottom to top and vice versa,

you can simply place the stop market entry order at the SAME PRICE as the dots and keep

moving it with the start of every new bar, until your entry price is touched and the position

is open, LIKE THIS:

That’s it... it’s that simple..

As can be seen on the screenshots above we’re waiting for the price to breach/exceed the

price of the Parabolic DOT/Level. When that happens we look to play the breakout, entering

with a stop market order at the same price of the Parabolic SAR dot.

Exiting the trade:

The Forex Parabolic Breakout System is not a trading methodology that has a stop loss many times further from the entry point than the profit target, like so many other forex systems out there, but rather it is a system that uses a 1:1 profit target and stop loss ratio. In other words, the amount of pips for the take profit are the SAME exact number of pips as the stop loss for every trade! So if the take profit is 24 pips for a trade then the stop loss is 24 pips as well. If the take profit is 52 pips for a trade then the stop loss is 52 pips as well. Although the amount of pips can change from trade to trade the take profit target and the stop loss are always an equal amount of pips, a 1:1 ratio. Anyone with any level of experience in Forex Trading will understand just how absolutely important this is. It means that one losing trade doesn’t wipe out the last 10 winners, as you’ve probably seen (or experienced) before.

Calculating the Take Profit Target and the Stop Loss:

So here’s how the number of pips for the Take Profit Target and the Stop Loss are calculated:

AS SOON AS the position is entered we’re going to look at the last 14 bars and take the High of each bar minus the Low of its bar and write down that number. Once we do this for each of

the last 14 bars we’re going to add all those numbers together and then divide that number by

14, which will give us the average. This is the value we’re going to use for the take profit and

the stop loss amounts. We do this for EACH individual trade.

The following graph AND the chart below it will help you understand this.

Again, as you can see upon entry we took the previous 14 bars and wrote down the high of

each bar and subtracted the low of the same bar to find the height of each bar. Then we

added the results together and divided by 14 (because there are 14 bars) to give us the

average height. In the example above, the total result was .0038 and therefor 38 pips. This is

the number we used for the Profit Target and Stop Loss, 38 pips. In this way you’ll know

EXACTLY how many Pips both the Take Profit and Stop Loss will be BEFORE ever enteringa trade, and determine if you're comfortable taking that trade beforehand!

Once again using this exact trading method we produced a 3 ½ year backtest* with the

following results

OPTIONAL Method of trading this system (tested at 83.91% Profitable with 23 maximum

winners in a row and maximum of 3 losers in a row).

Depending on your risk tolerance level you may want to use these settings but it’s entirely up

to you. There are TWO exits for this method. First, everything remains the same, as outlined above, however for the Profit Target Exit value, you take the number of Pips and multiple them by “.5” (or divide by 2) . Example: if the pip value for the target is 10 then you multiple it by “.5” (or divide by 2) and it becomes 5. THEN you take the Stop Loss Exit Values and multiple them by “1.5”. Example: if the pip value for the target is 10 then you multiple it by “1.5” and it becomes 15. So in these examples the Target is 5 pips and the stop loss is 15.

The second exit when trading this method is to close the position on the first profitable bar. In other words IN ADDITION to having the Profit Target and Stop loss exit, if the trade is in profit and a bar closes then the trade can be exited. Again, this method is optional. You may leave the  which will yield a less percentage of winning trades but can yield higher overall profits.

ENTRY METHOD #2 (Reversal for sideways markets)

At times breakout systems in general don’t work as well as at other times. Generally speaking breakout systems work better in volatile trending markets however there are times when the market trades in a tighter channel. In these cases a breakout method, such as the Forex Parabolic Breakout System, may tend to underperform. During these times an OPPOSITE ENTRY can be used. In other words in this case setting a LIMIT order to ENTER the market in the opposite direction may be in order. EVERYTHING, including the EXITS remains the SAME as was outlined above EXCEPT rather of entering LONG on the breakout of the UPPER Parabolic SAR DOT a SHORT entry would be made, and rather than entering SELL-SHORT entry on the breakout of the LOWER Parabolic SAR DOT and BUY-LONG entry would be used anticipating the price to reverse and head the other direction.

The performance data discussed earlier in this article, and in the sales page, does NOT include this ENTRY METHOD #2 however we decided to share this method as market conditions change from time to time and this method may be useful in that case.