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.
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