Parabolic SAR indicator
Trading with Parabolic SAR involves the following signals:
Parabolic SAR indicator is a trend indicator, which tells Forex traders about price stop-and-reverse points as well as trend direction. Its concept of usage is easy to understand from the first look.
When price is above Parabolic SAR dots, Forex traders should be holding Long positions only. Once Parabolic SAR dots come on top of the price - it is time to change trading positions to Short.
How to trade with Parabolic SAR indicator
However, trading with Parabolic SAR is not that simple; not all Parabolic SAR reversal signals can be traded profitably.
The way Forex traders use Parabolic SAR is by simply setting a Stop loss order at the level of the most recent SAR dot appearing on the chart. Stop is then trailed along with each new Sar dot till trend remains intact. Once Parabolic SAR indicator changes its position - SAR dots appear on the opposite side of the price - the trade is closed.
Welles Wilder doesn't recommend using Parabolic SAR as a stand alone indicator. The main reason for that is: Parabolic SAR can easily create whip-saws (false signals) during periods of market consolidation. The Parabolic SAR works best during strong trending periods, which Wilder himself estimates occur roughly 30% of the time. Thus Forex traders will need other Forex indicators to identify those strong trending periods.
How do you determine the trend if you don't want to use ADX. Try 50 EMA. Price readings above it would suggest an uptrend, below - downtrend.
Parabolic SAR settings
So, Parabolic SAR is developed to keep stop loss level moving adjusting to new prices and thus locking profits on its way.
Parabolic SAR has two variables: a step and max step. Settings recommended by W.Wilder are: a step of 0.02 and the max step of 0.2.
Parabolic SAR - useful tips:
Parabolic SAR indicator Formula
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