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What is Parabolic SAR? SAR stands for Stop and Reverse developed by Welles Wilder referring to a trading system based on price and time. This indicator was introduced in 1978 from the book “New Concepts of Technical Trading Systems.
The book also includes the relative strength indicator (RSI), the true range average (ATR), and the directional movement index (ADX). A treasure trove of indicators that you are the author of, although he was born early, his indicators are always in line with the times.
WHAT IS PARABOLIC SAR?
Sometimes the parabolic SAR is called a stop and reverse system. Actually, that’s what the translation means. It consists of key functions such as finding market entry and exit points, and highlighting a trend in the price of stocks, cryptocurrencies, forex pairs,…
Explanation of how it works As shown above, the parabolic SAR appears with dots on the chart. Placed above or below the candle, the price bar,… For example, a dot on the price represents bears (or bear markets) that are in control and the market may continue to go down.
When the dots flip across the other side of the candle, it is indicating a potential reversal indication of the direction of the price. As the price of an asset rises, so do the dots. The first is to move slowly and start sloping with the slope of the trend. Gradually, it will soon catch up with the price.
FORMULA FOR CALCULATING PARABOLIC SAR
The formula for this index is calculated as follows:
P(t) = P(t-1) + AF x (EP(t-1) – P(t-1)),
- P(t-1) is the value of the indicator in the previous period;
- AF is the acceleration index, which ranges from 0.02 to 0.2. Level 0.02 is the minimum required by the founder.
- EP(t-1) is the quotient of the lowest price and the highest price of the previous period.
HOW TO BUY AND SELL USING PARABOLIC SAR
What is Parabolic SAR? When it comes to the calculation formula, it is a bit troublesome and difficult to use. But taking into account the reuse is very easy. Essentially, you use this indicator with the Bitcoin chart illustrated below:
- Execute a “Buy” order when the dots indicate that they are below the candle.
- Execute a “Sell” order when the dots indicate that they are on the candle.
You may also find it simple, right? I see that myself. This indicator is easy because it assumes an upward or bearish price trend. In order for this tool to be optimized for its effectiveness.
It is recommended to use them in a market that is trending strongly. Or used in prolonged recessions and the price does not break a certain range.
Now let’s see how you should exit trading when using Parabolic SAR.
HOW TO USE THE PARABOLIC SAR TO EXIT A TRADE?
Exiting a trade means that you use this indicator to consider whether your position should be closed. Exiting a transaction using SAR is done as follows:
Below is a chart of the EURUSD currency pair. At the beginning of September, prices began to fall and fall rapidly. The trader opens a short position and analyzes for himself how deep the price falls?
By the beginning of December, at the bottom of the price appeared 3 dots of the Parabolic SAR indicator. This indicates that the downtrend is over, which is when you should exit your short position. If you don’t get out, as you can see, the price corrects and returns to the old area, so you lose money.
Three dots or 3 points of the indicator is also a rule for you to identify that reversal trend. However, when it appeared, the price had already moved quite a bit. So it also affects trading quite a lot.
– Learn more what is the cci indicator?
COMBINATION OF PARABOLIC SAR AND OTHER INDICATORS
Combining indicators together to give accurate trading signals is always a great thing. Some indicators combined to create effectiveness with Parabolic SAR can be mentioned such as: Stochastic indicator, MA line,…
When combined with the MA. The sell signal is more convincing when the price is trading below the long-term MA. This suggests that sellers are in control of the direction, and the sell signal could be the start of another wave even lower.
On the contrary, below is the XAUUSD chart if the price is higher than the MA-200 line. Consider this a buy signal when the dots move from top to bottom. The Parabolic SAR indicator can still be used as a stop loss. For example, also the chart of XAUUSD. If you plan to open a short position, wait for it to confirm a new trend (use an indicator you often use to identify it accurately).
When you receive a change in the trend, you place an entry as shown below. The stop is placed on the highest points of the parabolic SAR. Since the distance between setting the stop loss is quite large, opening a small wallet will be preferred.
IMPACT OF THE PARABOLIC SAR INDICATOR ON TRADERS
The basic features and uses I have stated, however, there are some traders who are affected by this indicator, which is fomo in buying and selling.
There will be traders who use it and lead to opening too many trades. Because the chart, with the dots of the Parabolic indicator shows a lot of trades.
Some traders will say that using only the MA will cover the entire bullish move in one trade. Therefore, the Parabolic SAR is often used by traders who want to catch a high move then exit the trade.
SAR works best in markets that tend to be stable. For example, in different markets, the dots representing the indicator tend to flip back and forth on the sides which can lead to false signals.
CONCLUSION
What is Parabolic SAR? It is generally a pretty good tool that is favored in technical analysis used to confirm trends. I always recommend you to use it in combination with other indicator tools to increase the accuracy of the signal. Using it to set a stop loss is a fairly popular proposition. So please consider before using.
