Parabolic SAR

The Parabolic SAR

The Parabolic SAR is an indicator that would show trends in the first place. It was developed as the RSI by J. Welles Wilder and can be viewed as a whole trading system. He is depicted by dots above and below the beams and candles. In simple terms are in an uptrend, the dots below the bars above them in a downtrend. These serve the same show as a trend indicator and a stop loss. The formula for calculation is as follows:

SARN SARN + alpha +1 = (EP - Sarn)

SAR n +1 is the level of tomorrow's point is called the acceleration factor alpha and EP is the extreme point, that is in an uptrend, the highest high and lowest low in a downtrend. The default value for alpha is 0.02, which is 2 percent. Every time the price breaks through the extreme point increases, the acceleration factor of 2 percent, you could say that the speed of the trend increases. As you can see on the attached chart, the points move with the direction of the trend. The trader should then manually reposition its stop-loss on the price levels of the points to stay as long as possible in the trade, but also to know when the trend is over. In addition, decreases with decreasing strength of the trend also the distance between the points and the price bar. This ensures that you lose as unrealized gains and drop out as early as possible, if the trend changes.


How to use the Parabolic SAR?

Again, there are again many ways to use the indicator to its advantage. The easiest way is to buy when the price point will appear under a bar and sell it once the point is above the bar. Then can be placed and tightened with each new bar with the indicator of the level of stop loss on points. It is therefore a trailing stop. Let's take a look at the chart. He is the recent development of the EURUSD on the 4 hour time frame dar. on the daily and weekly charts, we find ourselves in a clear downward trend, which is 4 hours chart in a sideways trend with a downward trend, so we only look for sell signals. Marked in blue rectangle appears our first good buy signal. The price breaks the stoploss (last red dot below the bar) and then falls for another 400 pips View definition in a new window. If we set the stop loss so each of the red dots on the levels that we have taken nearly 300 pips View definition in a new window and would have stayed very long in the trade. Looking further to the right you will find more good signals, however, one can also run each pointed the market moves, the harder it is to trade the Parabolic SAR.

In summary we can say that the The Parabolic SAR provides in trends good signals and levels for trailing stops, in the sideways trend, however, does not work, there will generate too many false signals and it comes to so-called Whipsaws, zigzag movements, a forex trader quickly thrown out of his trade .