Parabolic SAR — a convenient trend indicator that is equally well suited for trading Forex and binary options. With its help, you can determine the direction of the trend, the moment of its reversal, as well as set stop losses and take profits. The author of the indicator Wells Wilder is a well-known stock trading guru who gave the world RSI, ATR and other well-known indicators that we have been using with success for decades.
By the way, you do not need to download Parabolic Sar, it is preinstalled in the Metatrader trading terminal. Install the indicator on the chart by going to the menu: Insert -> Indicators -> Trend.
A settings window opens in front of us. For convenience, I will only change the color of the indicator to red so that it is better seen on the chart.
- parameter Step responsible for the speed of the indicator’s response to price changes. The lower this value, the faster Parabolic SAR reacts to price changes, but the number of false signals increases.
- parameter Maximum indicates how close the indicator can get to the price
The author of the indicator himself recommends the settings 0.02 and 0.2, that is, those that are installed by default.
How to use Parabolic SAR
Mainly by means of an indicator:
- determine the direction and moment of the current trend change – this makes it possible to find points of entry into the market, buy or sell
- set stop losses, including moving ones
Description of the Parabolic SAR indicator application: in an uptrend, the indicator points are located below the price, and in a downtrend, above. At the moment of the trend change, the price and indicator points intersect, that is, we consider the trend reversal the moment when the price breaks the dotted line drawn by the Parabolic SAR and the first point appears on the opposite side. I marked this moment with gray vertical lines.
And to determine the level of placing a stop order, we, again, use the indicator points. You can simply place a stop at the highest or lowest point (depending on whether we are buying or selling), or you can use a trailing stop order – this means moving the stop along the points following the price movement.
Parabolic SAR strategy
Thus, we get already the simplest trend following trading strategy using a trailing stop order and Parabolic SAR. In this case, we can not set take profit, but use only a trailing stop order. If we manage to catch a good trend, such a strategy will maximize profits, because we will stay in the market until the trend reversal. When this happens, we will be knocked out by the stop loss, but the stop will be short, and the profit by that time can be quite good.
Parabolic SAR should only be traded in conjunction with other indicators or used to complement any trading strategy. This is due to the fact that, like any other indicator, Parabolic is not without its drawbacks. The main one is that the indicator works well in trend areas, but gives a lot of false signals in the flat. Likewise, on a weak trend, profitability is very small and balances on the brink of loss.
Therefore, I advise you to use the Parabolic SAR indicator as part of any strategy, and I am sure you already understood the ways of such use.