Parabolic Sar: Riding Trends In The Forex Landscape

Parabolic Sar: Riding Trends In The Forex Landscape – Parabolic SAR is an indicator used to identify the end of recent trends in forex technical analysis. Sar stands for Stop And Reverse. It also shows the direction of the current forex trend.

In forex trading, entry level is as important as profit level. Most retail forex traders always ignore profit, but maintaining a good risk-to-reward ratio is also important. The PSAR indicator helps determine profit or exit levels.

Parabolic Sar: Riding Trends In The Forex Landscape

The SAR parabolic indicator works by placing a dot above or below the candlestick. The mathematical formula of this indicator is based on the price acceleration coefficient and extreme price value.

If the indicator consecutively places dots below the bar, but after placing a few dots, the next dot appears above the candlestick, indicating that the uptrend is over. The reversal of the points from the top to the bottom of the candle indicates the end of the downtrend.

This indicator is very simple to use, but only in popular markets. In a range market, it will not work at all because this indicator is basically designed to determine the direction of the trend and the end of a trend. Do not use the Parabolic Sar indicator in a volatile forex market

Use the three point formula to trade forex using the parabolic SAR indicator. For example, the indicator forms a series of points below the candlestick, but after a few points, the next point appears above the candlestick. But we will wait for at least three consecutive points above before deciding on a reversal.

Because during a minor price correction, the parabolic SAR indicator can reverse its direction for a short time. For this reason, wait for at least three reversal points to form before entering or exiting the trade.

How To Use Parabolic Sar In Forex

I recommend using the parabolic SAR to determine the profit level or exit level of the trade. Because complete reliance on a mathematical formula does not make profit in forex trading. By using the three point formula with price action strategies, the win ratio of a strategy increases.

Price action is a leading indicator. We will use price action to enter the trade and PSAR to exit. For example, in the trend line breakout strategy, opening a position right after the breakout and then using PSAR to identify the take profit or exit level. Like waiting for a three-point return and then closing the deal.

Using this method, you will sometimes get a high reward ratio during a trending market after a breakout. Because you will hold your position until the indicator shows a sign of the trend ending.

Parabolic SAR works best for swing trades like H1 or any higher timeframe. It can also be used for day trading like 15 minutes, but the best time frame for Parabolic SAR is H4 or 4 hours.

The Stages Of A Forex Trend

Parabolic SAR is a lagging indicator because it uses a mathematical formula. The only leading indicator in technical analysis is price action.

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Note: All comments here follow the rules of technical analysis and are for educational purposes only. We are not responsible for any kind of loss in forex trading.

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Parabolic Sar Indicators Mt4

A trend indicator created by the famous J. Welles Wilder, Parabolic SAR helps traders in many ways. SAR stands for “stop and reverse” and the main strategy of Parabolic SAR is to follow a stop loss in an uptrend or downtrend.

However, as you’re about to discover in this article, there’s more to it than simply chasing a deal. The way Parabolic SAR adapts to market changes gives rise to many Parabolic SAR strategies.

Like any other trend indicator, Parabolic SAR is lagging. This means it works mostly in bull and bear markets, in strong trend environments. And when the range is limited, traders have difficulty using it in a standard way.

The purpose is not to change the perspective of how to use the Parabolic SAR indicator. This is mostly to open your eyes to its flexibility and how easy it is to build a profitable parabolic SAR strategy just by knowing the capabilities and strength of the indicator.

Double Parabolic Sar Strategy

For those familiar with the option theory concept of time decay, it should come as no surprise that it is at the heart of the Parabolic SAR indicator. This means that the trader should liquidate a position if it is no longer making a profit.

The visual representation of the Parabolic SAR indicator on the chart is simple. All the trader sees is a few points above or below the main candlesticks.

However, the dots have one meaning. When above the price, the dots indicate bearish market conditions. And when it appears below, the condition is seen as bullish.

Here is the recent price action of NZDUSD. On the four-hour time frame, the Parabolic SAR indicator appears as blue dots (you can edit the color at any time) at the top or bottom of the price.

Parabolic Sar Is Simple To Use & Quite Reliable

It is easy to see the main advantage of using Parabolic SAR when trading in any market: it is highly visible and it is impossible to miss a strong trend such as a bearish trend in the NZDUSD pair.

We will not go into the mathematical details of how to construct the Parabolic SAR formula. Display nine formulas here.

What is important, however, is that the value of each point drawn on the screen is from the previous candle. In other words, the Parabolic SAR formula uses the data of the current period to calculate and predict the point of a previous period.

This means that for the future candle, the trading platform already calculates the spot based on what the current period is showing.

What Is The Parabolic Sar And How To Use It

In a way, it works similar to the Ichimoku Kinko Hyo, the famous Japanese indicator that shows the equilibrium position of the market. However, the difference is that the Parabolic SAR indicator shows the spot only one period ahead, while the Ichimoku shows the Kumo or cloud twenty-six periods ahead.

When applying the Parabolic SAR indicator on a chart using the MT4 platform, the first thing that appears is a pop-up window. With just a few settings, it shows how to change the color of the dots and their thickness.

But the other two boxes are more interesting. The default setting shows a step of 0.02 and a maximum of 0.2.

The Parabolic SAR formula includes a so-called EP or Extreme Point. Indicates the highest or lowest value recorded in the current bullish or bearish trend.

Indicator Strategy Parabolic Sar & Awesome: How To Use

From that, the Parabolic SAR formula subtracts the SAR for the current period. Finally, the formula multiplies the result by a so-called acceleration coefficient.

In this case, it is the value 0.02 that appears in the first box of the image above. That is, every time a new EP is formed in the process, the acceleration factor increases.

Because of this, sometimes the SAR may converge to the price. More precisely, it touches the candlesticks.

To avoid that, there is a maximum value of 0.2 with default settings. Because of this, some SAR Parabolic points appear closer to the candlesticks, while others appear further away from the body of the candlestick or even shadows.

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Obviously, traders can change the settings in any way they want. However, these were the initial parameters used by Wilder, and it is fair to assume that the Parabolic SAR indicator performs best with the original target values.

It’s time to examine which Parabolic SAR strategy works best in the forex market and how to get the most out of trending and volatile markets. Additionally, we will look at incorporating money management rules when trading a parabolic SAR strategy in such a way as to achieve reasonable risk-reward ratios.

Before anything else, remember the rules of a process. First, for a downtrend to exist, a series of lower lows and lower highs must form. Second, in an uptrend, the series changes to higher highs and higher lows.

The parabolic SAR trend trading strategy uses the same principle. But, in addition to the previously mentioned series, this principle also applies to SAR points.