this is an indicator that a lot of people really like and in its concept it's one

of the most simple and easy to follow parabolic SAR indicator so I can see why people would

like it so much and basically this indicator was created

well first of all SAR stands for stop and reverse and some people consider it

a trend following indicator and it can be used for that and so what we're

looking for here is this where you've got these dots see these dots overhead

here and as long as those dots are above price then we're short I'm going to

simplify things here maybe over simplified then when the dots go below

price levels then we go along with a bullish signal and the other thing

that's kind of nice about this is that so creates a that's where the quality a

trend-following indicator is that the parabolic SAR strategy is to go short

when dots are above it and long when dots are the low price and then it also

serves as a trailing stop so you just follow this long as long as the price

where as long as the dots stay below the candlesticks then you stay long and then

when it gets above now see here this of course is nothing's perfect and

everything has you know two little parameters whatever perfect parameters

you think you're going to come up with will never be perfect for every

situation so here we get one that goes above and comes back down below within

one bar so that would have stop and reverse you out and of course you

wouldn't want to really be stopped and reversed out that's one of my issues

with the indicator is I don't like the term stop and reverse because it implies

that trends that go up and then they go down and that's not typically how trends

actually go so to stop in Reverse means that you stop out of your long trade and

you go short the the downtrend that there'll be a trend following but really

what seems happened most of the time in markets and of course things change all

the time but more often we get enough trend and then the market can go

sideways for a little while and so this is why trend reversal trades usually

have a worse than 50/50 win-loss ratio never to go sideways for a while may say

okay well then it's gonna go short not necessarily sometimes it'll continue

into an uptrend so I don't like this whole concept of SAR stop and reverse

and calling it that so sorry to the classic technical analysis fanatics but

that's my personal opinion feel free to disagree with me it's a

free country free world whatever well the world's not free unfortunately but

anyway you've my permission to disagree with me type your comments in the

comments below if you do and I'm a big boy I can deal with that so then let's

take this off of here and see what happens so and you can see now the we

run into some problems let me just narrow this down a little

bit change our scaling so we had the the first example I showed you looked pretty

good right so it kept us into that trend here let me go back there old first a

little bit and just show you that again so here that would have worked out real

nice so just like most trend trading techniques they all look great and a lot

of indicators look fantastic as long as you're in a trend and those are the kind

of examples that they'll put in their text books and their videos and all that

kind of stuff and that's beautiful except for one

problem the market don't trend most of the time so I don't

know what the exact steps are anymore they vary I've heard well 30%

I think that's aggressive I've heard 20% now lately I've heard markets only

turned about 15% I do believe that the markets are trending less and less

frequently and by the way when this indicator was created it was actually

before of the time of the computer age so let's also be clear about that and

the computer age when the computer age came in then Marcus started trading very

differently price patterns changed differently or started forming

differently so if you trade methodologies based techniques that were

developed before modern computer technology entered the markets you've

got a prop you got a big problem you've got a big big problem it's not gonna

work for you so anyway so what we have to have happened here is what is typical

so alrighty so I showed this one a little dot here and then it goes back

down so now we're supposed to be in it uptrend and then the dots go back above

price bars and we're supposed to be in a downtrend but market didn't really go

down did it so then the price comes below the price bar so when we're

supposed to go up well doesn't go up much and then the bar

the indicator goes above the bars and so now we're supposed to go down and then

the bars go below and we're supposed to go up and then they go above I was

supposed to go down but the market actually ends up going up

well the parabolic SAR is above it so this is the problem you get this kind of

stuff happening when you're in a non trending market and by the way the

definition of trend is not direction the definition of trend is not higher highs

and higher lows anybody's told you that those are wrong definitions and they

will mess up your trading because trend is defined by Webster's dictionary

Webster's dictionary is the extended direction of well anything so extended

general direction means a long-term move these are short-term moves and therefore

none of these are trend and that's why I personally and her ethically do not

consider the parabolic SAR to be a trend indicator does not indicate long-term

moves as demonstrated here and you will see this you might say well that's just

one example fine pull up your own charts and you're gonna see plenty of examples

like this so in my mind it is not a trend indicator at all can it be a

decent trailing stop at times in trailing in training markets yes yes it

can be okay I still don't prefer it as a trailing stop why because for example it

starts too far away from the market so here is our first signal on that bar

right there and look how far away it is sure it tightens up but may protect my

initial protective stop it's too far away I don't want it to be that far away

initially so anyway it can be used though but the point is it can't be used

alone in fact no indicator and I'm not trashing the parabolic SAR so let's be

very clear about that because I will say this about any indicator no one

indicator will make you money now this one now stochastic snot MACD not RSI and

not CCI not LMNOP whatever acronym you want to put to it no indicator makes you

money there indicators and so it's an indicator well the the answers and the

question they indicate what they don't do is make you money directly otherwise

we would call them moneymakers so cannot still be used can it be helpful in your

trading and the answers yes it can be helpful as part of a complete trading

methodology so as I've implied here it can work pretty darn well and those

we've actually seen it can work pretty good for

a trailing stop especially after the market starts moving a bit I don't like

its initial potato stop there's the market starts moving a bit yes it can be

a pretty decent trailing stop but only in trending market and it does not

define the trending market so therefore one of the things that we will have to

add to it is a trend indicator of some sort so you can use whatever your

favorite trend indicator is but what the heck let's for today's purposes we'll

just use the ADX all right so let's pull up the ADX so now I've added the 14

period ADX to my charts here and a ninja trader they call it DM that actually

adds DM + + D - I'm not a 10 emails here I just want to keep things very simple

for you today and I put it at a threshold of 20 so this black horizontal

line here is set at 20 so basically when a DX gets above 20 then it's considered

a strong trend so now we're adding the two together

alright so we're not gonna depend on parabolic SAR for a trend will depend on

a DX in this example for it and here is the spot where it goes above now you'll

notice that it doesn't normally nail specific swing highs and swing lows and

once in a while it will but periodically or typically it won't most trend

indicators are by definition lagging indicators and there's a reason for that

the definition of trend is the extended general direction of the market

therefore you can't have a trend indicated until there's enough data to

establish that you're in an extended general direction and therefore it is

lagging mathematically but if you get into a trend like this so then it is and

by the way all the parameters oh you can't even see them sorry about that so

I know people will ask me about the is a parabolic SAR so there they are up

at there at the top left corner and I'll actually bring those up because I always

get this question so sure let's do it so parabolic scr there is the input that

i'm using for that and for the ad actually can see a DX here i've got

positive di o- d i blacked out i don't want to see those right now but it's a

period of 14 right and you can experiment with different periods you

can experiment with different threshold lines i've got it at 20 different people

use different periods that's fine there's no magic period but anyway so

what we do here is we say okay so now we've got a trend established and this

point and we'll use this as our trailing stop our parabolic SAR as our trailing

stop not gonna use it as a stop and reverse necessarily but and so there we

go now what you'll also notice is that the

ad ax starts coming down here and that's also kind of a little signal that okay

maybe we have put in a high and so this whole situation here where parabolic SAR

went above the bars then below bar at the bars down above the bar is real

quick you also see a confirmation of that here on the ad X where it's

diverging and starting to come down so and it just it comes down down down now

don't think this the one thing I don't like about the ad X is that it doesn't

indicate a trend after you got to the top coming back down you've gotta wait

for it to reset below the threshold line in this case 20 so this does not

indicate a downtrend just because it's coming down and therefore you've got to

wait this period all this period the indicators really not telling you

anything other than maybe might be indicating that okay it's good to get

out of your long trade but know you've got to wait for it to reset

before you get another trade signal a lot of time can go by as you see this is

a daily chart and you know couple months go by so and then by the way just to

show you what we showed before so all of this noise is here let we looked at if

you look at that noise and you say wait a minute gave us a long signal here a

short signal here long stood only here short signal here a long statement short

signal that whole time ADX was first of all declining back down

to the zero line and then it stayed below the zero line indicating that

there's no trend therefore we don't want to use the parabolic SAR in that

situation so this is where you combine different types of indicators for

different purposes in order to develop a successful trading methodology so if you

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