HomeKNOWLEDGETechnical analysisWhat is Parabolic SAR?

What is Parabolic SAR? [How to use it effectively in trading]

parabolic sar . concept

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Parabolic SAR developed by Welles Wilder deals with price and time based trading system. SAR stands for Stop And Reversal. This indicator was introduced in 1978 from the book “New Concepts of Technical Trading Systems”.

The recommended book also includes the relative strength indicator (RSI), average true range (ATR) and directional movement index (ADX). A treasure trove of indicators that he is the author of, although born early, his indicators are always suitable for the times.

parabolic sar example

What is Parabolic SAR?

Parabolic SAR is a technical indicator that highlights the price trend of any asset, as well as providing entry and exit points to the market.

SAR pulls in price when a trend persists over time. This indicator is above the price when the price is rising and below the price when the price is falling. The indicator stops or reverses when the trend reverses and breaks above or below.

Watch now: What is technical analysis? 

Sometimes the parabolic SAR is called a stop and reverse system. In fact, that's what the translation means. It includes key functions such as finding entry and exit points in the market, and highlighting a trend in stock prices, electronic money, bag forex,…

function of parabolic sar
Parabolic SARs are points on a chart that represent a potential reversal in price action.

Explanation of how it works

As shown above the parabolic SAR appears with dots on the chart. Placed above or below a candle, price bar, etc.

For example, a dot above the price shows that the bears (or Bearish market) are in control and the market could continue to go down. When the dots flip to the other side of the candle, it is indicating a potential reversal in price direction.

When the price of an asset increases, so do the dots. The first is to move slowly and start steeply following the slope of the trend. Gradually, it will soon catch 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, ranging 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 price in the previous period.

How to buy and sell using Parabolic SAR

When it comes to the calculation formula, it is a bit complicated and difficult to be effective. But taking into account re-use is very easy.

Basically, you use this indicator with the Bitcoin chart illustrated below as follows:

  • Execute command"Buy” when the indicated dots are below the candle.
  • Execute command"Sell” when the indicated dots are above the candle.

how to use parabolic to trade

Surely you also find it simple, right? I can see that myself. This indicator is easy because it assumes for an up or down price trend.

In order for this tool to be optimized for its effectiveness. It is advisable to use them in a strong trending market. Or used in prolonged recessions and prices do not break a certain range.

Now let's see how you should exit the trade when using the Parabolic SAR.

How to use Parabolic SAR to exit a trade? 

Exiting a trade means you use this indicator to see if your position should be closed.

Exiting trades 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 plummeted rapidly. Trader opens a short position and analyzes for himself how deep the price falls?

By the beginning of December, in the bottom zone of the price appeared 12 dots of the Parabolic SAR indicator. This shows that the downtrend is over, it's time to exit your short. If you don't exit, as you can see the price corrects and returns to the old zone, so you lose.

The three dots or three points of the indicator are also a rule for you to determine that trend reversal. However, when it appeared, the price had already moved quite a bit. So it also affects the transaction quite a lot.

exit using parabolic sar

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 efficiency with Parabolic SAR can be mentioned as: Indicators Stochastic, Street MA,…

When combined with the moving average. Sell ​​signals are more convincing when the price is trading below the long-term MA. This shows that sellers are in control of the direction and a sell signal could be the start of another wave lower.

Conversely, below is the XAUUSD chart if the price is above the MA-200. Please consider this a buy signal when the dots move from top to bottom.

price is above MA200, good buy signal

The Parabolic SAR indicator can still be used as stop loss. For example also chart of XAUUSD. If you plan to open a short position, wait for it to confirm a new trend (use an indicator you use often to identify it).

When you receive the change of the trend, you set the entry as shown below. The stop is placed above the highest point of the parabolic SAR. Since the distance to place the stop loss is quite large, it is preferable to open a small account.

use as stop loss

Impact of Parabolic SAR indicator on traders

The basic features and usage I have stated, however, there are some traders who are affected by this indicator. 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 just using the moving average will cover the entire upside move in a single 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 with steady trends. For example, in ranging markets, the dots representing the indicator tend to flip side to side which can lead to false signals.

Summary

It is generally a pretty good tool favored in technical analysis for trend confirmation. I always advise you to use it in combination with other indicator tools to increase signal accuracy.

Using it to place a stop loss is a pretty common recommendation. So please consider and consider before using it. Thanks!

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