How many times in your life have you been in a hurry to exit the market and close the deal too soon? There is nothing more terrible than to early leave the market. After all, this is equal to lost money. The Parabolic SAR technical analysis indicator will help to correctly determine entry and exit points and get maximum profit from the market.
The indicator is built on a price chart and resembles a parabola, which is reflected in its name. Parabolic SAR is specially designed to eliminate the lag effect that is detected when using multi-component indicator systems.
Do you want to learn more about the Parabolic SAR forex strategy and get the maximum out of every trade? Then you should read our article.
Well-known stock trader Welles Wilder developed the Parabolic SAR in 1976 to search for market pivot points on a chart. Wilder is the author of several useful books on trading theory and the author of such popular indicators like RSI and DMI. All of his tools are often used in different trading strategies.
Advantages and Disadvantages of Parabolic SAR
The main advantages of this indicator include the following:
• It reacts to a change in time, and not just to a change in price;
• It determines the trend reversal on time and with high accuracy;
• The indicator finds the most profitable entry/exit points of the market;
• It allows you to apply the tracking;
• It works great as a filter in any trading strategy.
It has fewer shortcomings, but we must take them into account. They are the following:
• It cannot be called a universal tool for all types of trends. In the flat, its signals are not convincing and clear enough to determine the direction of the trend and the opening of trading positions.
• In a flat, the indicator also gives too many false or inaccurate signals. For this reason, it is categorically not recommended to use it in outsets.
Practical Applications of SAR
Now we will examine in detail all the options where you can use the parabolic SAR indicator.
1. Trend Definition
The reversal of the Parabolic SAR curve indicates a change in trend. So, the appearance of the next point in the direction opposite to the price means the possible completion of the current trend and its formation in a new direction. The reference points of the breaking indicator are the maximum/minimum price of the previous period.
When the price touches and crosses the Parabolic curve, the indicator moves to the other side relative to the price and changes its direction. This suggests that the direction of the trend has also changed. Using this feature of Parabolic SAR, be sure to consider the following points:
• The stronger the trend, the wider from each other are the points that form the parabolic curve. It is not worth entering the market in such a situation, so as not to fall on a possible rollback of the price.
• The probability of a price reversal is higher with a decrease in the distance between the points of the SAR curve.
• Work with Parabolic SAR only on the older timeframes to get rid of the false signals that are typical when working with this indicator on younger TFs.
• When trading on junior TFs, enter the market after building 3-4 consecutive points at the beginning of the formation of the next parabolic curve. These points confirm the entry signal in a new price direction.
2. Market Entry Points
Good results with this tool can be obtained on a strong trend or at the stage of its completion. The market entry signal should be considered the intersection of the price with the Parabolic SAR curve and its gap with the transition to the opposite side relative to the price chart. If the entry signal was correct then on a strong trend, the trader will be able to take the maximum profit from the market.
It is important here that with an obvious break of the Parabolic SAR curve, the first point of the forming parabolic curve should be under the forming candle. At the same time, the last point of the old indicator curve should lie above the previous bar.
At the break of the Parabolic SAR curve, the first point of the emerging parabolic curve lies above the forming bar, and the last point of the old indicator curve lies under the previous candle. Some traders enter the market immediately at the intersection of the price with the indicator curve, putting this moment as the end of the current and the beginning of a new trend. However, it is more logical and safer to enter the market after receiving confirmation of a signal for an established trend.
Search for Points to Close Positions
It is very convenient to use this indicator to determine the points of closing positions, placing Stop Loss and Trailing Stop orders. There is a simple technique that traders, working with SAR, use for the most profitable and break-even closing of transactions.
After opening a position and setting Stop Loss, you should observe the price and the drawing of indicator points. You just need to move Stop Loss on the chart to the level of the next formed point, putting higher prices for sales. And you need to put lower prices for purchases.
If the price moves in your direction, you will close the field where the price intersects with the Parabolic SAR curve and when the first point appears on the opposite side. In the event of a sharp and strong rollback of the price, your transaction will close with profit.
We remembered one of the oldest technical analysis tools that have not lost their relevance in our days. The Parabolic SAR tool is undeservedly forgotten by many traders. However, we remember that everything good is actually well-forgotten old.