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When you enter a trading position, you will ask yourself where to place the stop loss level. And when the trade works in your favor, you will ask yourself how to meaningfully trail your stop loss to protect profits.
Fortunately for us, there are numerous stop loss strategies to help us with these 2 questions. We will discuss the Parabolic SAR stop loss method.
The Parabolic SAR is a technical indicator that is used by many traders to determine the direction of an asset’s momentum and the point in time when this momentum has a higher-than-normal probability of switching directions. Sometimes known as the “stop and reversal system”, the parabolic SAR was developed by the famous technician Welles Wilder, creator of the relative strength index, and it is shown as a series of dots placed either above or below an asset’s price on a chart.
In the chart above, we see this indicator as the purple dots trailing prices. In a bull trend, the dots appear below prices; and above prices in a bear trend. As such, it is very useful as a stop loss indicator.
Upon entering a long position, a trader would move up his stop loss level to the dots, which follows prices closer over time. The 2 horizontal black lines you see are the levels which were “taken out”, after trailing the respective dots.
You can see how the Parabolic Stop Loss can serve as a convenient indicator to place stop loss levels. Note that this stop loss indicator works best in trending markets, as it can “whipsaw” as well.
Learn Trading Online: How to Trade Commodity Channel Index (CCI)
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To construct the commodity channel index (CCI), compare the current price with a moving average over a specific period. Next, normalize the oscillator values by using a divisor, based on mean deviation. The CCI fluctuates, in a constant range, from positive 100, to negative 100.
>Positive 100 represents overbought situations, and <negative 100 represents oversold situations. 100 and -100 are represented by the dotted lines in at the bottom of this EURUSD Chart. The CCI line is in turquoise, oscillating between 100 and -100.
Trend lines (in black diagonally) can be drawn on the CCI. Notice that divergence happens, when the CCI makes lower highs, while prices are still making higher highs. This is an indication of a potential reversal, and we see CCI turning before prices did. This is useful for traders timing the markets.