The forex market is probably one of the most chaotic markets in trading. Whenever you open a bare chart, you usually find a market that is going up in price everywhere. This is probably one of the reasons why currency trading seems to be one of the toughest markets. However, there are ways to understand this chaotic market and tame the noise of price that is everywhere. It does this through the use of indicators. Often times, some naked chart price action purists would say indicators are a source of noise. However, if the right types of indicators work together, you would see how a chart would make more sense. You would see how clear the trend direction is in relation to the indicator.
The SAR oscillator
The parabolic time / price system, also known as "Stop and Reverse" (SAR), was developed by Welles Wilder and introduced in 1978 in his book New Concepts in Technical Trading Systems. While this indicator may seem very old, it is one of those classic indicators that has stood the test of time.
The mathematical concept behind the SAR is quite complex as it uses If-Then formulas depending on whether the SAR is indicating an uptrend or a downward trend. It's one that takes advantage of the extreme price points that are the highest highs and lowest lows. With the classic SAR indicator, the information derived from the SAR is then displayed as a point in the price diagram. These points are usually used for trailing stop losses because in theory the price shouldn't touch the SAR points when the market is trending.
With the SAR oscillator, however, histogram bars are not shown in the price list, but in a separate window. Positive histograms are considered bullish, while negative histograms are considered bearish. If you look at a price chart and compare it to the SAR oscillator, you will see how clearly it follows the trend.
The HAMA indicator
The HAMA indicator is a custom trend indicator that is good for identifying established trends. If you take a closer look at it, it kind of resembles a Heiken Ashi Smoothed indicator, which is basically a modified Heiken Ashi (HA) derived from moving averages (MA). The type of moving average used is typically an exponential moving average (EMA).
Although it is unclear what the mathematical formula behind the custom HAMA indicator is, this indicator is one of the indicators that works well as a trend following indicator. Some traders interpret it as a trending indicator and act as if they were trading a crossover strategy. Whenever the HAMA indicator changes color, traders take the trade in the direction of the trend. Some would trade retraces on the HAMA indicator and expect a rebound.
Trading strategy concept
The SAR oscillator and custom HAMA indicators are trend following indicators that work well in identifying established trends. If you look closely at them in a clearly trending market, the price would rarely go up on the trends these indicators show.
These indicators also work well as complementary indicators. The input signals generated by these indicators appear close together. The SAR oscillator seems to be reacting faster while the HAMA indicator seems to be reversing less frequently. However, when these indicators are in agreement with each other, the market appears to be moving strongly, so the price can move widely in one direction for some time. These converging turning points based on an overall picture trend will be the focus of our trading strategy.
Before we get into the actual input signals based on the two indicators, we will use a long term trend filter based on the 200 period exponential moving average (EMA). Only trading configurations that are in line with the trend indicated by the 200 EMA will be considered. Whenever the price and HAMA are above 200 EMA, the market is considered bullish. On the other hand, the market is seen as bearish when the price and HAMA are below 200 EMA.
Then we will look for input signals generated by the HAMA and the SAR oscillator that conflict with each other and are close to each other, with deviations of two to three periods. These will be our entry signals.
We will then hold trading until the SAR oscillator shows signs of possible trend reversals as the SAR oscillator usually generates signals before the HAMA indicator.
- 200 EMA (gold)
Time window: preferably 1-hour and 4-hour charts
Currency pair: Major and minor pairs
Trading session: Meetings in Tokyo, London and New York
Buy (Long) Trade Setup
- The price should be above 200 EMA
- The HAMA should be above 200 EMA
- Wait for the price to decline, which will result in a temporary bearish state in the HAMA and SAR oscillator
- Wait for the SAR oscillator to print positive histograms indicating the resumption of bullish market condition
- Enter a buy order as soon as the HAMA indicator changes to royal blue, confirming the resumption of the uptrend
- Place the stop loss under the HAMA indicator
- Close the trade as soon as the SAR oscillator prints a negative histogram indicating the possible end of the uptrend
Sell (Short) Trade Setup
- The price should be below 200 EMA
- The HAMA should be below the 200 EMA
- Wait for the price to decline which will create a temporary uptrend in the HAMA and SAR oscillator
- Wait for the SAR oscillator to print negative histograms indicating the resumption of the bearish market condition
- Once the HAMA indicator turns red, enter a sell order, confirming the resumption of the bearish trend
- Set the stop loss above the HAMA display
- Close the trade once the SAR oscillator prints a positive histogram indicating the possible end of the bearish trend
This strategy is a high probability, high return trading strategy. This is because both the intermediate trend represented by the HAMA and SAR oscillator and the long-term trend represented by the 200 EMA are aligned. This often resulted in trades with a reward-to-risk ratio of 2: 1.
There will be some instances where building a trade would result in a loss. This could be due to a stop loss being hit early. You can opt for a mental stop loss to avoid this situation. However, you would need strict discipline if the price reversed in trade.
Other cases of loss could be due to an actual trend reversal after it occurred. This usually occurs with an overstretched trend. Avoid trades that appear to be in an over-trending trend.
All in all, this strategy should produce some gains when implemented with proper risk management.
Forex Trading Strategy Installation Instructions
The SAR Smooth Trend Forex Trading Strategy is a combination of Metatrader 4 (MT4) indicator (s) and template.
The essence of this forex strategy is to transform the accumulated history data and trading signals.
The SAR Smooth Trend Forex trading strategy provides the ability to spot various peculiarities and patterns in price dynamics that are invisible to the naked eye.
Based on this information, traders can assume further price movements and adjust this strategy accordingly.
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How do I install the SAR Smooth Trend Forex Trading Strategy?
- Download SAR Smooth Trend Forex Trading Strategy.zip
- * Copy mq4 and ex4 files to your Metatrader directory / Experts / Indicators /
- Copy the tpl file (template) into your Metatrader directory / templates /
- Start or restart your Metatrader client
- Select the chart and timeframe in which you want to test your forex strategy
- Right click on your trading chart and hover over “Template”.
- Move right to select the SAR Smooth Trend Forex trading strategy
- You will see the SAR Smooth Trend Forex trading strategy available on your chart
* Note: Not all forex strategies come with mq4 / ex4 files. Some templates are already built into the MT4 indicators of the MetaTrader platform.
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