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

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parabolic sar concept

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

The introductory book also includes relative strength indicators (RSIAverage true range (ATR) and directional movement index (ADX). A treasure trove of indicators that he is the author of, even though born early, but his indicators are always in line with the times.

parabolic sar for 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 on prices when a trend persists over time. This indicator is above prices when prices rise and below prices when prices fall. The indicator stops or reverses when the trend reverses and breaks above or below.

Watch now: What is technical analysis? 

Sometimes parabolic SAR is called a stop and reverse system. In fact, that is the meaning. It includes key functions such as finding entry and exit points, and highlighting a trend of stock prices, electronic money, bag forex,…

function of parabolic sar
Parabolic SAR are points on the chart that show potential reversals in price movements.

Explain how it works

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

For example, a dot above the price is shown for the bears (or bearish market) are controlling and the market may continue to go down. When the dots flip across the candle, it is showing a potential reversal of the price direction.

When the price of an asset increases, so do the dots. The first is to move slowly and start sloping along the slope of the trend. Gradually, it will soon catch up with the price.

Parabolic SAR formula

The formula for this indicator 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 previous period indicator;
  • AF is an acceleration indicator, ranging from 0.02 to 0.2. The 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, sell using Parabolic SAR

When it comes to formulas, it is a bit confusing and difficult to work. But considering the reuse is very easy.

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

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

How to use parabolic to trade

Perhaps you also find it simple right. Myself also see that. This indicator is easy because it assumes an upward or downward 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. Used in prolonged recessions and prices do not break a certain range.

Now, let's see how you should exit trading when using Parabolic SAR.

How to use Parabolic SAR to exit trading? 

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

Exiting transactions using SAR is done as follows:

Below is a chart of the EURUSD currency pair. In early September prices began to fall and plummet rapidly. Traders open short positions and analyze for themselves how deep the prices are.

By early December, at the bottom of the price appeared 12 dots of Parabolic SAR indicator. This shows that the downtrend has ended, it is time to exit your short order. If you do not exit, as you can see the price corrected and returned to the old area, you are at a loss.

Three dots or three points of an indicator are also a rule for you to identify that trend of reversal. However, when it appeared, the price had moved quite a bit. So it also affects a lot of transactions.

exit parabolic sar command

Combine Parabolic SAR and other indicators

Combining the indicators together to deliver accurate trading signals is always a great thing. Some indicators combined to create effect with Parabolic SAR can be listed as: Indicator Stochastic, Street MA,…

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

Conversely, below is the XAUUSD chart if the price is above the MA-200. Watch this buy signal as the dots move from top to bottom.

The price is above the MA200, a good buy signal

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

When you get a change of trend, you set the entry as shown below. Stops are located above the highest parabolic SAR points. Because the distance of the stop loss is quite large, opening a small wallet will be preferred.

Use is stop loss

Impact of Parabolic SAR indicator on traders

The features and basic usage I mentioned, but there are some traders affected by this indicator are the fomo in buying and selling.

There will be traders who use it and result in opening too many trades. Because the chart, with the dots of the Parabolic indicator shows lots of transactions.

Some traders will say that just using the MA line will cover the entire price increase in a trade. Therefore, Parabolic SAR is often used by traders who want to catch a high move and 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 that can lead to false signals.

Summary

It is generally a good tool for technical analysis used to confirm trends. I always advise you to use it in combination with other indicators to increase the accuracy of the signal.

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

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