Has anyone done it? Does it work on trends? Does it stop me from giving back profits?
I have spent months of my life using a parable to create an amazing exit that captures the profit through trends but doesn’t give it all back. When I first started, I was obsessed with it because I was amazed at how fantastic this indicator was on how it accelerates up towards the price, and then when it turns down, it flips. I initially thought that it was an excellent exit.
What are the disadvantages for Parabolic SAR as an indicator?
It doesn’t work. Because it’s completely the opposite of what people want to do, which is the opposite of what works. If you think about trend following when a move progresses in your favour, what happens to the amplitude of the swings in that move is they get bigger. If the trends go in our favour and then it goes down, we gave back 25% of our profit of the peak price. But what you miss is the fact that you’re up a bazillion percent from where you started when it hit your trailing stop. The way trend following works is you’ve got to give it room to move proportional to the price of the instrument you’re trading. That’s why it gets wider when you start to freak out, and our account swings bigger as the trending progresses. For trend falling to work, you’ve got to give it leeway proportional to the asset’s cost.
Parabolic SAR accelerates towards the price as it moves up, which is doing exactly the opposite as it moves up, giving it less leeway; so that when it pulls it back, it exits quickly. It does a great job of accurately catching a minimal price swing. If what you’re trying to do is accurately catch a minimal price swing, it’s probably a legitimate indicator, but if you’re trying to catch a big trend, not so much.
Yeah. I’ve done that many times. But, you know, you have an idea in your mind, and you say, oh, this will work.
The concept of Parabolic SAR and applying it to a trailing stop, can you tighten it if it moves in a favour?
It looks excellent on some trades, but you miss out on it. The tightening often gets you out earlier in the trend so you might get out with a more certain profit. But the expected profit is less so you have to deal with less drawdown. You get less profit in total because it doesn’t allow you to stay in for those big moves.