The Parabolic Combo strategy

Description

The Parabolic Combo strategy was described in an article written by Martin Hander published in 2011 in the Traders Magazine. The key component in this trading strategy is the popular and visually appealing Parabolic SAR. In addition, the stop also follows the Parabolic SAR as seen in this example:

Although back-tests results appear variable, we include the strategy because it is a trend following strategy. Trend following strategies are often considered the most successful trading strategies.

These are advantages of the Parabolic Combo strategy:

Visually appealing.
Published in well-known trading magazine.
Trend-following strategy.
Unique trailing stop.
Can be used in many time frames and on all instruments.

Suitable for	: Market indices (DAX, DOW, CAC...) : Forex (EUR/USD...) : Commodities (oil, gold...) : Stocks
Instruments	: Futures, CFD-Forex and stocks
Trading type	: Daytrading and swing trading
Trading tempo	: Variable
Using NanoTrader	: Manual or (semi-)automated

The strategy in detail

The direction and the strength of the trend are indicated by combining the Parabolic SAR (PSAR) and the Average Directional Movement Index (ADX), which is a component of the Directional Movement System developed by the famous Welles Wilder.

The PSAR is indicated as a dotted line in the charts. If the dotted line appears below the market price, the trend is bullish. If the line appears above the market price, the trend is bearish. Welles Wilder’s ADX, measures the strength of the trend. A high number (above 25) indicates a strong trend. A low number (below 25) indicates a weak trend.

Martin Hander uses his Parabolic Combo strategy to trade on 60-minute charts and on day charts. Other time frames are also possible.

When to open a position?

When the market closes above the PSAR and the ADX is above 25 a buy signal is generated. A short sell is generated when the market closes below the PSAR and the ADX is above 25.

But… not all signals are accepted. The Parabolic Combo strategy also contains a filter, a crossing exponential moving average. If the filter is bullish (green chart background) buy signals are accepted. If the filter is bearish (red chart background) short sell signals are accepted.

This example show the ADX with a value of 24,76 and the filter.

This example shows a buy signal (green triangle). The market price closes above the PSAR, the ADX is above 25 (not visible) and the chart background is green, indicating the signals filter is bullish.

This example shows a short sell signal (red triangle). The market price closes below the PSAR, the ADX is above 25 (not visible) and the chart background is red, indicating the signals filter is bearish.

When to close a position?

The strategy only relies on a stop order, there is no profit target. The position is therefore either closed by the stop loss or when the direction of the Parabolic SAR changes.

The stop order is a very unique trailing stop. Indeed, the stop follow the dotted line of the Parabolic SAR. Optionally, the user can add a little extra distance between the dotted PSAR line and the stop order.

This example shows two buy signals. The red lines are the stop loss orders. Both positions are closed by the stop several periods later.

This example shows a short sell position. Notice the stop loss order lies above the dotted PSAR line. The trader added an extra distance of 15 ticks. This short position was closed when the Parabolic SAR changed direction.

This example shows a back-test on Apple in the day chart.

This example shows a back-test on WTI crude oil in the 30-minute chart.

This example shows a back-test on the DAX index oil in the 5-minute chart.

Practical implementation

Using the NanoTrader follow these steps:

Select the instrument you wish to trade and open the chart.

Select the strategy in the WHS Strategies folder.

If required, adapt any parameters as described above.

For semi-automated trading, activate TradeGuard+AutoOrder in the chart. For automated trading, activate AutoOrder in the chart.