If the dot is below the candle this can be a signal to BUY or an uptrend. When the change occurs (the dot goes from below to above the next candle) this indicates a potential price reversal may be happening or a pullback and continuation move.
Some may think why not just trade the dots. When it reverses, just make an entry at that price. Technically you can trade like this and may win some, but this is a very risky way to trade this indicator. You need other tools to validate this potential trend.
Here are the indicators you need to apply on your chart to use this trading strategy:
strategy: Default Settings
20 Length Moving Average= Blue color
40 Length Moving Average= Red color
Rule #1- Apply system and Moving Average indicators to chart
Rule #2- The Indicator must change to be below price candle for uptrend.
Notice how the dots were above the price. The parabolic stop and reversal ( sar ) formula was that the price stalled out for a few hours and then the dot appeared below the candle.
Rule #3- Another element that must occur is the moving averages must cross over.
In a long trade, the 20 period moving average will cross and go above the 40 periods moving average.
So now the 20 period moving average is above the 40 period moving average. Also the dot appears below the price candle.
Rule #4- dot must be below price candle AND moving averages cross to where 20 period MA is above 40 period MA.
Note** One of these elements may occur before the other. The reversal dot can appear before the MA lines cross. Or the Moving averages can cross before the reversal candle. As long as there are both elements, the entry criteria are met.
Rule #5- Enter The Next Price Candle...
Enter (BUY) the very next price candle after the dot appears below the candle. You can see on our chart where we entered the trade. Waiting for one candle after makes sense because this proves to us that this reversal is strong. The moving averages are supporting the uptrend + the dot is signifying an uptrend.
Rule #6- Stop loss / Take Profit
Follow your own SL plan
Take Profit is taken when the 20 and 40-period lines cross over again. OR when the dot reverses appears at the opposite side of the candle. Moving average crossover will give you a larger profit.
If SELL trade just adjust above
I have added the Waddah Attar Explosion Indicator - type in Indicator search: Public Library "WAD"
This helps filter a better entry when hits the band and blue dotted line