Trend trading with MA , Parabolic and Stochastic

Trend trading with MA , Parabolic and Stochastic is a trend following strategy build with the following indicators:

1. The 8 Exponential Moving Average (EMA, close.

2.  Stochastic Oscillator (14, 5, 5)

3. Parabolic SAR with settings of - 0.04/0.2

8 EMA - The 8 EMA is used to identify the direction of the market on a 15 min chart.

The Stochastic and Parabolic SAR are used as e confirming indicators.

1. The red line indicates the 8 EMA (Marked as A)

2. The graph at the bottom is the stochastic slow with settings 14, 5,

5 (marked as C)

3. The mini dots marked is the parabolic SAR. (Marked as B)

4. The red and blue bars are bearish and bearish candle respectively (marked as D).

For a Buy trade setup, the candle should break and close above the 8 EMA. As soon as this happens, you should look for the values of the Parabolic SAR and Stochastic.

Parabolic SAR and Stochastic Slow indicators – In a buy trade, the Parabolic SAR should be below the candle.

Note: The way the parabolic SAR works is that if the parabolic SAR is on bottom of candle it means the trend is bullish but if it is on top of candle that would mean a bearish trend.

The Stochastic Indicator on the other hand has oversold and overbought ranges. With the settings we have, it is safe to assume that if the value of Stochastic is above 80, that signifies the market

is overbought but if it is below 20, that means the market is oversold. For a buying trade to happen, the Stochastic Indicator should be climbing up. Incase the stochastic is above 80, that would mean the market is already in oversold category. In such case don’t place the trade since the chances of a buy trade ending in a loss will be high.

The above chart shows two examples –

1. A Bullish Trade. – Represented by Points A through D

2. A Bearish Trade – Represented by Points 1 to 3

• Point A represents a bullish candle that just crossed 8 EMA. The parabolic SAR is below the candle and the Stochastic is moving up. So at the end of this candle we open the trade.

• At Point B we are in 37 pips profit. This is important from Trade

management point of view. We’ll cover trade management later.

• Point C is the candle where the maximum profit is 96 pips. But this is also the candle where the trade is closed by the trailing stop loss. (We’ll cover all this in Trade management.)

• Point D represents top of the Wick from where market found resistance and retraced to hit stoploss and ending the trade with 84 pips in profit.

Sell

The Candle should have just crossed below the 8 Exponential Moving Average (EMA).

2. The fast Stochastic should have crossed below the slow stochastic and should be moving down. (The only exception is if the stochastic reads below 20 since the market is already oversold. If

this is the case, then don’t take the trade setup)

3. The parabolic SAR should be above the candle.

Point 1 represents the candle where the sell trade setup criteria are met. That means the candle just crossed below the 8 EMA, Parabolic SAR is above candle, the stochastics are moving down.

• The point 2 represents the candle from where the trade started to goin profits. Note that there are few candles in between which represent the market going in other direction, but that can happen occasionally. However our trade management guidelines will taken care of this.

• Point 3 is the candle where the trade ended with 72 pips profit!!

Stop-Loss. Stop loss as you know is to protect you trade and your account incase your trade goes in loss. While setting a stop loss, you identify a level or amount of loss you are ready to take in the trade. So, for e.g. if you entered a buy trade on EUR/USD at 1.3000 and you are ready to risk 35 pips, then you set the stop-loss at 1.2965. So if themarket starts falling, then as soon as price touches 1.2965, your trade will get closed automatically.

Example of trade

The above chart is for a trade setup on GBP/USD currency pair. Let’s analyze the chart and apply the trade management principles as well.

1. The candle crosses over the 8 EMA, parabolic SAR is below it and the stochastic was climbing up. Also the candle is bullish. We all know what this means. It means that we can open a trade at the

close of this candle.

2. Once the trade opens, we place the initial stoploss which is represented by line 1. In this example, the stop loss was 34 pipsbelow the entry point.

3. The Candle B represents the point where the trade is in 25 pips profit. As mentioned above, as soon as the trade is reaches thisprofit level, we move the stop loss to the entry price (represented by

line 2) From this point onwards, the trade can never end in loss.

4. Next, Candle C represents the point the trade is in 42 pips profit. As per the guidelines I mentioned above, when the trade is in 40 pips profit, the stop loss is moved to 15 pips from entry price towards the direction of trade. That’s represented by line 3 So, now we are guaranteed to make atleast 15 pips in profit.

5. Candle D is of 26 pips in size. By this time our profit is 81 pips. Do you know where our stoploss would be? Yes, it was 50 pips from entry point as represented by line 4

6. Finally the candle E where the profit reached 107 pips and stop loss moved to line 5 (which is 80 pips from entry price). The next candle is a retracement and where our trade ends as it hits our

stop loss after 80 pips in profit!!After this bearish candle, the market could have retraced further. Andas shown in the chart above, it retraced significantly after few more candles.