There are many strategies one can use in trading. Some are based on candlestick patterns, others on the indicators. The method I am going to present today relies on two indicators. The Parabolic SAR and the Stochastic are their names. Let’s see how it works.
Introduction to the indicators needed in 2-step trading strategy
The Parabolic SAR
This is a tool that follows the price. It helps to determine the price direction and when it changes. It is in the form of a series of dots that appear below or above the candlesticks. This indicator is also known as “stop and reverse” because when the trend is changing the direction, the dots stop and appear on the other side of the price bars.
To read more about the Parabolic SAR, check out our Tutorial for Using Parabolic SAR on Olymp Trade.
This technical indicator was invented by Dr. George Lane in 1950. Its job is to give you a hint on what will happen shortly on the market.
The Stochastic Oscillator is composed of two lines that run within values 0 and 100. Nevertheless, you will notice two horizontal lines with values 20 and 80 in the indicator’s window. This is because they indicate when the price falls into the oversold and overbought zones.
The two lines of the oscillator are called %K and %D. Another name for the first one is the Fast Stochastic. It follows the current price of the financial instrument you are using. The second one is also known as the signal line or the Slow Stochastic and is the moving average with the period of 3.
The calculations for this momentum indicator looks as follows:
%K = 100 (C – LowN) / (HighN – LowN)
N stands for the period that is used for the Stochastic calculations. The default value is 14.
C is the last closing price.
Low N is the lowest price observed within the N period.
High N is the highest price measured within the N period.
The points of the trader’s interest are the moments when the %K and %D intersect.
A signal to enter a long trade is produced when the %K crosses the %D from beneath and move further above it.
A signal to enter a short transaction is when the %K cuts the %D from the top and continues below it.
As I mentioned before, you can also observe the oversold and overbought zones with the Stochastic Oscillator. When the line %K falls below the 20 value, the financial instrument you are trading is regarded to be oversold. When it exceeds the 80 values, the asset falls into the overbought zone.
Moreover, you can catch the divergence with the Stochastic. It is the space that is formed between the two lines of the oscillator. When the gap between the %K and %D is growing, the trend expands. When the space between them is narrowing, the reversal of the trend is the most likely choice.
How to set the chart with the Parabolic Sar and Stochastic at Olymp Trade
The first thing is to access your account on the Olymp Trade platform. Then, choose the financial instrument for this session and set the Japanese candlestick chart. Now, click on the indicator feature icon which you will find on the left side of the platform. Select “Parabolic” from the list of the indicators available at Olymp Trade.
You have the possibility to change some of the indicator’s parameters. If you wish to do so, simply click on the pencil icon next to the indicator’s name. Here, you can change the step parameter, the size, and the color of the dots.
Now, you have to click the indicator feature icon again. This time select the Stochastic Oscillator from the list. Similarly, you can adjust the indicator’s settings by clicking the pencil icon in the Stochastic window.
How to trade with the 2-step strategy that combines the Parabolic SAR with the Stochastic on the Olymp Trade platform
Opening a buy position
First, check the Stochastic Oscillator. A favorable situation occurs when its lines are located below the 20 value that is they fall into the oversold zone. Furthermore, the %K intersects the %D from beneath and runs over it.
Then, look at the Parabolic SAR. The dots have just stopped appearing above the price bars and now they are visible below them.
All these give the signal that the uptrend is coming and you should open a buy position.
Opening a sell position
Again, start by checking what is going on with the Stochastic Oscillator. The situation we are waiting for is when the Stochastic lines are located over the 80 value that is they fall into the overbought zone. Furthermore, the %K intersects the %D from above and continues below it.
Take a look at the Parabolic SAR. The dots have just stopped appearing below the price bars and now they are developing over them.
You should open a short position with these signals.
Pros and Cons of 2-Step Trading Strategy😊🙁
- Comprehensive Analysis: Combining two indicators provides more accurate signals for trading.
- Detection of Reversals: The strategy can help identify potential trend reversals in the market.
- Requires Concentration: This strategy demands attentive monitoring of both indicators and market conditions.
- False Signals: As with all indicators, there’s a risk of receiving false signals, leading to incorrect trading decisions.
Characteristics of Parabolic SAR and Stochastic Oscillator📈📉
|Parabolic SAR||Tracks price direction and change, represented as dots above or below price bars. Helps identify potential reversals.|
|Stochastic Oscillator||A momentum indicator that compares a particular closing price to a range over a certain period. Helps identify overbought and oversold conditions.|
The 2-step strategy combines two indicators and that is why requires a great focus from you. You need to follow both and wait for all the conditions to happen before you enter the trade. Only then do you have significant chances to end up with a profit.
You enter the position together with the opening of the candle that develops after the signals occur. Observe the Stochastic first, wait for the lines crossover, and then focus on the Parabolic SAR. Wait for the moment when the dots stop and reverse. Then open a buy or sell transaction.
The length of the position depends on the chart time frame you are using. With 5-minute period candles, like in my examples, you can open a position for 15 minutes or longer.
Go directly to your Olymp Trade demo account and try out today’s strategy for yourself. However, make sure the strategy suits your trading style, and that you have studied it and practiced it enough before you move on to trading real currency.
Share your thoughts with us in the comments section below.
Enjoy the trading!
Quick Q&A Section🔍
- Q: What is the main purpose of the Parabolic SAR in the 2-step strategy?
A: It tracks price direction and signals potential reversals, which can be key entry or exit points in trading.
- Q: How does the Stochastic Oscillator complement the Parabolic SAR in this strategy?
A: It provides insights on momentum and potential overbought or oversold conditions, which, combined with the Parabolic SAR’s signals, can help enhance decision-making in trading.
- Q: What are some of the potential pitfalls to watch out for when using this strategy?
A: One should be cautious about potential false signals and always cross-verify with other indicators or analysis tools. Concentration and attentiveness are key to making the most of this strategy.
- Q: Can the 2-step strategy be used on different timeframes?
A: Yes, it can be applied to any timeframe, but it’s important to note that reliability can vary depending on market volatility and other factors.
- Q: Does the 2-step strategy guarantee success in trading?
A: No strategy can guarantee success in trading as the market is influenced by various unpredictable factors. It’s always important to manage risks effectively and use strategies as part of a balanced, informed approach to trading.
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