The Parabolic Sar And Ema Share Trading Strategy

Many top financial experts are suggesting that the current stock market is basically a trader's market rather than an investor's market. So with that in mind I thought I would share with you an effective share trading strategy that I sometimes use to trade shares.

It basically involves a combination of exponential moving averages (EMAs) and the parabolic SAR indicator. The parabolic SAR uses the default settings and the EMAs I use are basically the 5, 20, 50 and 200 period ones, although the latter two are just there for general guidance.

The trigger for a potential set-up comes when the EMA (5) crosses the EMA (20) with the parabolic SAR being triggered at the same time. These should both correspond with each other so if the EMA (5) crosses upwards through the EMA (20), then the parabolic SAR should change to a buy signal as well at roughly the same time.

As regards entry and exit points, you can enter straight away or at the close of the current bar but I personally prefer to wait for a slight pull-back to the EMA (5) in order to get a good entry point. You can exit the trade when the parabolic SAR changes signal again, when the EMAs cross back again in the opposite direction, or simply when you have achieved your profit targets.

Of course this system is not perfect by any means but in a strong trending market it can be used to capture some really big moves. If you really want to improve the success rate of this simply strategy, you can use the longer term charts to show you the overall trend and only trade the signals that are generated in the same direction as this long-term trend.

For instance if you use this system to generate trading positions on the daily chart for a given share, you could improve your success rate by looking at the weekly and monthly charts. If they are both showing either an upwards or a downwards trend, then you should only be trading in this direction on the daily chart. By doing this you will eliminate a lot of the counter-moves which often fizzle out fairly quickly.

Overall this simple strategy is one that I continue to use on a regular basis to trade those strong trending shares and it tends to work fairly well. In this market you need to be able to trade shares both long and short and this strategy will allow you to do just that.

By: James Woolley

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