MACD, RSI and SAR Combination:
In Forex trading, parabolic Stop and Reverse, or Parabolic SAR for short, is one of the more visual of the technical analysis indicators. A series of dots are shown below and above the price action, rising with rising prices, and falling with falling prices, so indicate an uptrend and a downtrend. However, the series of dots continues in an upward or downward direction until the reversal has been confirmed, and not before, and so the dots will eventually hit the price action. It is then that you should stop the trade and take a position, stop and reverse.
There is a problem with this, however, and it is that Parabolic SAR does not indicate the trend, and so we cannot take a buy position when the dots are below the price action. However it can be used for:
1. Placing the trailing stop-loss orders and also moving the take-profit levels.
2. Closing the position when the SAR indicates the time is appropriate.
However, matters are not as clear-cut as this, so before discussing each of these situations in detail, let's first determine when the Parabolic SAR indicator is appropriate and when it is not.
First Rule: Parabolic SAR offers relevant analysis of trends, but is not appropriate to a sideways movement of price. Therefore, in order to determine whether the trend analysis is valid, you must confirm whether or not the situation is truly a trend.
To confirm the trend you must use Forex technical analysis, and one or more of the undernoted situations must apply:
a) ADX: ADX should be over 25 and rising.
b) A bullish MACD for uptrend and bearish MACD for downtrend, i.e. when the MACD line is crossing above the signal line and below it respectively.
c) A bullish stochastic (crossing over signal line) or bearish stochastic (crossing below signal line).
Any of these conditions indicate a definite uptrend or downtrend. That being confirmed, we can now confidently use the parabolic SAR as below:
1. Putting trailing stop-loss orders and moving take-profit levels
When the market is moving upwards and you have a long position, you can raise your trailing stop-loss levels upwards from previous levels, and can also raise your take-profit targets at the same time. This should be done while you are also checking the three Forex technical analysis indicators above to make sure the trend is maintaining an upwards movement. Similarly with short positions: with a downward trend move stop-loss levels downwards from previous levels. As long as the other indicators do not indicate any slowing of the trend, then you can also move your take-profit levels downwards.
2. Using the parabolic SAR for stopping and reversing the position
SAR can indicate a trend reversal, and so can be used for stopping and reversing positions. When you have a long position during an uptrend, the rising dots will close up to the price action, and after some correction the action starts going down - the rising dots will eventually hit the down price. This is an indication by SAR that you might be safest to close the position since the price is likely to continue downwards.
However, although you can now close the position and open a short position, you must first check the three indicators above, and if a downtrend is not yet confirmed you should stop the long position but do not reverse. In that way you can take profit without committing when there is still a possibility of another trend reversal.
The same principle applies when you have a short position during a down trend. When the price reverses and the falling dots hit the rising price that is an indicator for you to close the position and take profit. It is important that you also maintain a close eye on any emerging classical chart patterns in addition to the above Forex technical analysis indicators, since they may also be used as clues as to the action to take.
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