SAR (Stop and Reverse) is a market neutral trading system that is always in the market. It automatically gets you long when market is going up and short when the market is going down. Stops are reversal points. People follow different methods to calculate SAR levels. It can be moving averages, Bollinger bands. Pivot points, some market profile levels etc.
I have very keenly observed the development of some SAR systems. Very simple mechanical systems later became very complicated and discretionary. More and more tweaks and rules were applied on it. Tweaks involve multiple lot entries, partial exits, re entries and filters.
I just could not understand the use of filters. SAR is just a number that helps you to stay on the right side of the price move and not a barrier to price move. Further, multiple lot entries and partial exits will do more harm than good. The basic concept of the system is to sit tight through the whipsaws and capture a big trend move. Here you will end up getting whipsawed in multiple lots and cant capture the full benefit of the coming trend move due to partial exits.
Markets are cyclical in nature and alternate between trends and ranges. Expect a lot of whipsaws during the ranging period and never forget Market ranges 70% of the time. We may need to take all the signals as we will never know which one is going to be a home run. During the trend moves you will be able to recoup your earlier losses for sure. But once the market start to consolidate and range again you will give back everything and will be back to square one.
Another problem occurs when you want to scale up your trading. After gaining some decent profit you become confident and double your stake. Immediately market decides to range and wipe out the entire profit earned during the past in no time. Long term profitability of a SAR system cannot be judged with two or three years of data and back testing as the market cycles may vary. Profitability will depend on where you start and where you quit. Hard core SAR specialists can always paint a rosy picture like the wayside fruit seller, who always hides the rotten apples behind the fresh ones. Do not question them. They always keep their “Discipline” cane handy
In my humble opinion, Market will not give you any static edge. Why should Hedge funds spend millions of dollars hiring specialists for research? Why mutual funds are struggling to produce alpha? It is a shame that Goldman Sachs and Credit Suisse professionals are not aware of this wonder method.
I will not advise you to stay away from SAR methods as I have not traded this method live and have no right to say so. I am not responsible if you miss a fortune by not trading the method. I will suggest you to try a plain vanilla SAR method for a very long time. Be prepared for a life long Roller Coaster ride.
I am approaching fifty and I have neither the time nor the patience for this endless Snake and Ladder game.