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Parabolic SAR when Trading Forex

The Parabolic SAR is widely used Forex traders as it offers an easy way of determining instantly the price trend.

At a Glance

• Name: Parabolic Stop and Reverse (SAR)
• Usage: Price Trend / Reversal Identification
• Timeframes: From 1-minute to 1-Month Charts
• Standard Settings: 20% Max Step and 2% Acceleration Factor (.02, .002)
• Crucial Levels: When the SAR dots change position (Moving Upper or Lower the Price Chart)

The Parabolic SAR is a directional indicator used to determine the price direction of any financial asset. It was developed by J Welles Wilder Jr.

Parabolic SAR Explained

The Parabolic SAR is widely used as an easy way of determining the price trend. Furthermore, it provides an easy framework for identifying when to enter and when to exit the market. As an indicator, it is fully visualized as it plots a series of dots or dashes which are able to pinpoint the real price action.

Here are the main advantages when using the Parabolic SAR:

(1) Can be used by all trading styles and in all timeframes (from tick price charts and up to monthly charts)

(2) Easy to use signaling system, even for beginners

(3) Parabolic SAR can generate tens of trading signals on a daily basis

(4) Can be used to analyze any financial market and any asset (stocks, indices currencies, commodities)

(5) Determines also the take-profit and stop-loss levels

Calculating the Parabolic SAR

Calculating the Parabolic SAR is a little bit complex, in general, the indicator is calculated as follows:

■ Rising SAR = Previous SAR + Previous AF (Previous EP + Previous SAR)

■ Falling SAR = Previous SAR - Previous AF (Previous SAR- Previous EP)

-AF means Acceleration Factor and it is a variable that determines the SAR sensitivity (may be altered)

-EP means Extreme Point and it represents simply the Highest High (Bullish Markets) or the Lowest Low (Bearish Markets)

Technical Behavior

■ When the dots of the Parabolic SAR are plotted above the price chart, then the indicator signals a bearish price direction

■ When the dots of the Parabolic SAR are plotted below the price chart, then the indicator signals a bullish price direction

The parabolic SAR becomes very useful when the price of an asset is moving in a clear trend (trending). When the indicator is used in ranging markets the result is usually false signal generation. 

Important Notes

-The Parabolic SAR can be used for trend identification in any market (Forex Currencies, Stocks, Indices, and Commodities)

-The Parabolic SAR provides more reliable trading signals when the market is moving on a specific mid-term trend

-Traders can use additional indicators (for example MACD) in order to filter the trading signals generated by the Parabolic SAR

-Intraday traders can lower the variables of the basic settings in order to make the indicator more sensitive to narrow price movements

-Long-Term traders can increase the variables of the basic settings in order to make the indicator less sensitive and be able to take advantage of long-term trends no matter the pullbacks that might occur in smaller timeframes

■ Parabolic SAR when Trading Forex

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