SAR, the Number , a math not a myth! A Trader's view on What is SAR Trading and How to Trade on SAR system – Post # 2

Click here to check the previous Post # 1 on this series about SAR Trading .

Why SAR Trading?

As I said in the previous post, successful transformation of the trading experience turns us to be winning trader.

SAR Trading is the most convenient way to transform your experience for your growth, without missing a drop of it.

Every experience is unique. Success lies in using all the experience in execution when you face similar situation again. Every experience should be remembered and effectively used in trading to save you from crisis or to make you rich when opportunity arises. Better way to utilise all your experience is by travelling in the same path. This may sound stupid as mostly we hear that “choose the path never travelled”. This concept does not fit with our own trading business. 

Choosing different path every time might give you the pleasure, when you are travelling to a particular city. But travelling through the convenient same route again and again makes you clear with the travel plan. It helps you to plan better and leads to the destination quickly and efficiently. It also allows you to reduce your expenses and you will be ready with alternate plan by default incase of any problem.

Trading is not for pleasure but to make profits. So, do travel in the same route and get familiar with the route to reach the destination efficiently. You have to find a system and do your trades consistently based on that system to gain enough experience. 

SAR Trading is a system which takes you through same path repeatedly and makes you aware of the obstacles in the journey towards your destination.

Its same market, same errors and same frustration. Many of us fail to promptly apply our experience in trading. This is where combination of SAR Trading concept and Technical Analysis helps. A SAR Trading brings you the quality of disciplined approach and Technical Analysis helps you to learn the price behavior. Mechanical trading system constantly provides entry/exit signals after observing price action. Your job is just to follow it. 

By adapting the SAR Trading, you can understand character of markets and learn trading psychology better and faster than discreet trading. 

What are all can be a SAR system?

You may come across many SAR systems and wonder that everyone is making fortunes except you. Please understand there is no real Holy Grail system. Purpose of this article is to destroy such kind of hesitation in trader’s mind and make everyone feel that trading system is not everything.

 I always used to tell my friends that you can make profits even with a daily business newspaper. Every business newspaper carries a stock picks column. If you follow any one newspaper’s stock picks consistently for a year without skipping any of the recommendations and strictly following their stop loss, you will attain 100% return by end of the year. This is also a mechanical trading. 

Any number can be a SAR number. Any system can be a SAR system. Mostly, Moving Average numbers are used as SAR number and it can be any of the Simple Moving Average, Exponential Moving Average, Weighted Moving Average, Hull Moving Average, and Triple Exponential Moving Average etc..  

There are plenty of the systems that can be adapted for SAR Trading. Few of which are listed down. 

1.       MA Close values – 3 day or 5 day SMA or EMA etc..

2.       MA High values – 3 day or 5 day SMA or EMA etc..

3.       MA Low values – 3 day or 5 day SMA or EMA etc..

4.       Pivot Point Averages

5.       Mid or Median Point averages

6.       Donchian midpoints

7.       3 or 5 day or 20day high (Donchian High)

8.       3 or 5 day or 20day  low  (Donchian Low)

9.       3 or 5 day higher/lower close

10.   Moving Average Cross overs ( Eg: 5 EMA on 21 EMA)

11.   TenkanSen or Kijun Sen Ichimoku clouds system

12.   Ichimoku Kumo Cloud emergence.

13.   Bollinger bands or Midline

14.   5 day or 10 day volume profile and its POC

15.   VAH and VAL of market profile

16.   Volume Weighted Average Price

17.   Average True Range

18.   Future expiry price (Havala)

19.   Daily, Weekly and periodical ORB

20.   Keltner Channels

And many more you can add. Even 100 day or 200 day SMA can be taken as SAR if you are a real long-term player like saving for your newborn kid. Just see the below 5year  chart of Nifty to know what kind of comfort you can have when you trade with such slow moving average SAR number.

I have given the above list just to give an idea as to how you can spot your mechanical trading system. Some of the above may give poor performance when it comes to SAR Trading with certain counters. So, do your back testing (explained later in this series) before following any of the above systems blindly. As I said, above are just a few ideas. Once you started searching for your system, you will see many good systems on the way of your search.

Not only “Any Number” but also a “Specific Methodology” such as “4 week rule ” can also be used as  mechanical trading (of course, even the daily newspaper recommendation numbers ! )

I have given the above examples, which mostly do not require constant monitoring of the markets throughout the day. You place the order once in the day and the trade is over. Next day, you wait for fresh signal to manage the trade.

Which is the best trading system i.e, Holy Grail?

Nothing or everything!

Trading system or methodology is merely a vehicle. It’s your disciplined approach, your understanding on your trading system and most importantly the consistent application are the fuels to drive your vehicle sucessfully. Without these fuels, you can only simply sit in the seat of the vehicle and can’t move at all!

Presentation shown below will clearly establish what kind of importance one should give to a trading system. I have made the below presentation with the 3 year Nifty EOD chart along with four of the successful SAR systems.

I have personally tested many SAR numbers and all of them have given more or less same returns in the long term. That is, over a period of 2-3 years. Most importantly all the SAR systems catch the bigger moves without fail. There may be a slight lag in the entry or exit among the systems which is absolutely negligible compared to the returns in the long run. For example, at the time of euphoria when Nifty made a high of 6339 on diwali-2010, all the seven SAR trading systems I have back tested had switched to buy trend simultaneously. 5 systems had triggered a buy on the 01^st Sep ’10 and 2 systems signaled buy on 02^nd Sep ’10.  All the systems turned into buy mode in the price range between 5419 and 5495.

Above presentation and example clearly shows that any SAR system can clearly capture the trend. One should understand that success mainly lies ONLY in the approach and not in the system.

Let’s close now with the above. I’ll come up with the following in the next post.

What are all cannot be a SAR system?

A point to note while selecting a SAR system :

What are the markets/contracts/ counters suitable for SARsystem?