Parabolic Sar and Stochastic Strategy

The Setup

To apply this concept, we will be using two indicators. One is the Parabolic SAR, which is a good indicator to identify medium-term trend. Another is the Stochastic Oscillator, which is good at identifying mean reversals on the micro level. For those who are new to trading or are not quite familiar with the Parabolic SAR, we will be identifying trade direction by identifying where the Parabolic SAR is in relation to price. If the Parabolic SAR is below price, then we will only look for buying opportunities. If it is above price, then we will only look to sell. As for the Stochastic Oscillator, we will be using the common fast setting of 5-3-3 on the Stochastic Oscillator’s parameters. We will use it the usual way, where our buy entries will be the crossovers on the oversold area, while our sell entries will be the crossovers on the overbought area. This will be our entry signal. Timeframe: 5-minute chart Buy Entry:  Price should be above the Parabolic SAR  Wait for the fast stochastic to cross above the slow stochastic on or below the 20 level (oversold).Enter a buy market order at the close of the candle corresponding to the crossover

Stop Loss: Set the stop loss at the fractal below the entry price

Take Profit 1: Set the take profit for the first half of the position size at 2x the risk on the stop loss Take Profit 2: Set the take profit for the remaining half of the position size at 5x the risk on the stop loss.

Sell Entry:  Price should be below the Parabolic SAR  Wait for the fast stochastic to cross below the slow stochastic on or above the 80 level (overbought)  Enter a sell market order at the close of the candle corresponding to the crossover Stop Loss: Set the stop loss at the fractal above the entry price.

Take Profit 1: Set the take profit for the first half of the position size at 2x the risk on the stop loss
Take Profit 2: Set the take profit for the remaining half of the position size at 5x the risk on the stop loss.

Having the two main components down, trade direction and entry, we get to have a high accuracy trading strategy. This strategy would work well on a trending market with a deep retrace on the micro level. However, if the trend is too strong, no entries will be generated since the Stochastic Oscillator won’t be printing overbought or oversold levels. However, if the market is ranging, this strategy would more likely keep you out of a trade.This is because the signals generated by the Stochastic Oscillator won’t coincide with the trend direction indicated by the Parabolic SAR, which is a good thing. Where this strategy would fail however is on a reversal market. During reversal markets, price could continue going the wrong direction even if the Stochastic Oscillator is on an overbought or oversold market condition.