Parabolic SAR Indicator
We considered indicators that mainly determine the beginning of a new trend. Although it is very important to determine the origin of a trend, it is equally essential to be able to see its end. In this article, we are going to discuss a technical indicator that is used to determining the end of a trend and known as the parabolic SAR indicator (Stop And Reversal).
Parabolic SAR is based on the price chart and developed by J. Wells Wilder to analyze trending markets. The parabolic is derived from the parabolic shape of the “points” that follow the main trends. It is not classified as an “oscillator” technically, but the indicator is frequently used with generators. Parabolic points are easy to interpret and represent a potential change in price behavior.
On the “Up Trend” (Bull Trend), the indicator is below the prices, on the “Down Trend” (Bear Trend) – above. It is really easy to use when the points are below the candles, it is a BUY signal. When the dots of the Parabolic SAR indicator are above the candles, it is a SELL signal. Parabolic SAR is the best fit tool used in the markets that are trending, and which have long rallies and recessions.
Calculation of Parabolic SAR
In the parabolic formula, today’s value is calculated based on yesterday’s data. The formula is based on following steps:
SAR + 1 = SAR+ A (EP –SAR)
SAR and SAR+1 are today’s and tomorrow’s Parabolic SAR values
EP=Extreme Point, it is equal to the highest price or lowest price and updated if a new “max” or “min” is observed.
A=Acceleration coefficient starts with by default value of “0.02” and mostly ends with a maximum value of “0.20”.
How to use the SAR?
This indicator appears in the form of small dots located above or below the price. When the price rises above points, the market will be considered as a bullish trend. Otherwise, it will be a bearish trend in the case of lower points.
The main thing is not the graphs themselves, but the SAR indicator. According to my opinion, this indicator is primarily suitable for those traders who are looking for quick deals.
If you take a closer look, you will notice that in most cases when a point appears, the next candlestick is formed in the direction indicated by the SAR indicator. This is a great signal to place a buy or sell transaction in the direction indicated by the points. If you are trading forex, then in order for you to make a profit, the price should move a large number of points in your favor. However, this indicator should not be confused with strategy. Trading on the basis of signals of this indicator alone, you put your account balance at risk.
What is the bad in Parabolic SAR?
Unlike the examples above, often this indicator is not so accurate. Sometimes 2 or 3 points appear on one side of the price, and then the indicator changes its mind, and these points appear on the other side of the price. This is very annoying and confusing for traders. Such indicator behavior may indicate a trendless market, low volatility and insufficiently strong price movement. But on the other hand, while the next candle closes one point above or below our strike price and in the direction indicated by the PSAR, we close the profit trade.
Why is the Parabolic SAR good?
The traders who prefer to trade often can find various uses for the SAR indicator. In addition to the first transaction, the indicator to which the first point gave a signal, the trader can enter into other transactions, as long as points continue to appear on the same side of the price. When used in the combination with other indicators that determine the direction of the trend, SAR can become the basis for an effective strategy.
It is a very useful indicator that it is easy to use. Initially, if the points are below the candles in the chart, then this is a buy signal; and when the dots above the candles, it is a sell signal. Parabolic SAR is the easiest indicator to use since it involves the movement of prices either up or down.
On 5-minute charts, the Parabolic SAR indicator can generate a lot of signals and fulfill the needs of those traders who trade often. However, it should be borne in mind that this is only an indicator, and therefore it should not be used independently, but as part of your trading strategy.