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.
CAR is a better name - Chop and Reverse, lol!
ReplyDelete
ReplyDeletei think choosing and sticking to one security or index while trad SAR method is very important.
I generally go on increasing by position size as my SAR system starts losing money, coz with good SAR SYSTEM , the winning trade is not far and will recover more than what i lost.
Adyant Pandya.
Adyant Pandya
ReplyDeleteMartingale SAR ?
Great !
ST
ST i dont know martingale SAR's concept. I have seen many people(from doctors to drivers) who buy lottery tickets every day with the same number. The result/winner is any number between o to 9 which is declared every morning.
ReplyDeleteThese people keep doubling their position size with same number everyday.
After loosing may times one fine day they are winner with all loss recovered and mega profit.
After coming to know this funda i am using it in trading Mini Nifty contracts.
SAR traders can think of this.
Adyant Pandya.
Thanks ST. Very Insightful. Going forward, will try to avoid SAR circus.
ReplyDeletejust an observation....sar systems that flip on close of the candle beyond the sar line offer very good low risk entry points when the candle touches the sar line...
ReplyDeleteregards..
Ananth
ReplyDeleteI think you are referring to the Parabolic SAR.I followed the thread by "dpaterso" at Baby Pips for two years and the conclusion by the thread owner is as follows
"I STARTED this thread almost two years ago!!! Believe me when I say this: not only myself but DOZENS of others tried everything that was humanly possible to make money out of trading 'pure' Parabolic SAR and failed dismally!!!
If you're happy to make small profits over a VERY extended period of time and have the capital to suffer the drawdowns then by ALL means: carry on with Parabolic SAR"
Read
ST
Super post..eye opener for many..
ReplyDelete