In this new edition of our trading strategy series, we will explore how you can utilize an EMA-based trend indicator and the Parabolic SAR to develop a successful trading strategy. We will delve into the basic concepts behind each indicator and how to effectively combine them to generate accurate trading signals that you can use to improve your trading results.
The active and dynamic financial markets are constantly providing opportunities to profit from the day-to-day moves and volatility. One interesting combination is the exponential moving average (EMA) and the Parabolic SAR (PSAR) indicator. This powerful combination can help traders make informed decisions on when to enter and exit trades, leading to very reliable results.
A SMART method for trading the markets
The SMART Dolphin strategy is a smooth way to trade the markets and catch the main directional movement. SMART, in this case, stands for Specific, Measurable, Actionable, Risk Management, and Tactical. The SMART Dolphin strategy helps us do all of those things, which is why it is a very practical approach to trading.
We are using a special exponential moving average (EMA) setting as the base for determining the overall direction. The Parabolic SAR gives us the entry points and our stop loss. At the same time, the stop loss is the exit strategy since the PSAR indicator provides trailing stops.
The key to the exponential moving average in the SMART Dolphin strategy is its special settings (period 55 with shift 8) and the additional details we examine when considering a trade. To help with this, we plot the Bulls Power and Bears Power indicators, which will give us a better scan of the underlying trend, almost like an x-ray.
The Bulls Power and Bears Power are similar indicators that show the momentum of the bulls and the bears separately. Thus they are two graphs, as shown in the chart below. You can find these in the MT4 platform (they are installed by default).
As for the 55-period EMA, it is our main trend indicator. When the price trades above it, we consider the bulls are in control, and the trend is up. When the price is below the 55-period EMA, bears control that market (the trend is down).
You will notice that most of the time, the Bulls Power and Bears Power indicators will confirm the same trend as the EMA. But not always. In some instances, one of them will switch the trend while the other will remain unchanged. This is an indication that the trend change is potentially fake. Wait for both the Bears and Bulls Power indicators to switch the trend.
Once we have the trend confirmed across all three measures, we then look for the Parabolic SAR to give a trigger in the same direction. That means the PSAR should start plotting dots below the candle bars during uptrends. In downtrends, it will simply be the opposite. The PSAR dots then serve as our stop loss levels.
Indicators used for the strategy:
* Exponential moving average (EMA) - period 55, shift 8
* Bulls Power – period 55
* Bears Power – period 55
* Parabolic SAR
The SMART Dolphin strategy works across all timeframes and asset classes. That means you can freely use it in all your trading without limits.
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