What indicators can be used to help determine stop levels? The Parabolic SAR (PSAR)
or the Average True Range (ATR). The pros to the Parabolic SAR is that the stop
levels (dots on the chart below) work good in a strong trend but don’t work good
at all in ranges. Even in mild trends I’d discourage their use. However, look at
how well they do on the strong trending part of the chart pointed out below. Consider
placing your stop at the point of the red dot on the chart underneath the uptrend.
The Parabolic SAR calculates a trailing stop. Simply exit when the price crosses
the SAR. The SAR assumes that you are always in the market, and calculates the Stop
And Reverse point when you would close a long position and open a short position
or vice versa.
The Parabolic SAR was developed by J. Welles Wilder and is described in his 1978
book, New Concepts In Technical Trading Systems.
To recap: The best technical indicators are firstly trend lines/support/resistance/volume.
After that would come the versatility of the MACD. It can be left on the chart at
all times. Use only buy signals in the uptrend and sell signals in the downtrend.
Use both signals in a range.
In Trends use 2-3 of the following maximum:
1. Trend lines
2. Moving Averages
3. MACD (buys in uptrend or sells in downtrend)
4. ADX (above 30)
5. PSAR (for stops in strong trends) OR
6. ATR levels for stops
In Ranges, use 2-3 of the following maximum:
2. MACD – both buy and sell signals
3. Bollinger Bands
5. Slow Stochastics
6. ADX below 30
7. ATR levels for stops