About The Parabolic SAR
The Parabolic SAR indicator is quite a simple indicator, most effectively used in trending markets. The indicator is quite useful in both the entry and exit for trades. Forex Traders can use the parabolic sar for mechanical and automated trading styles.
What Is The Parabolic SAR
You may be wondering what does SAR mean? SAR means stop-and-reverse, meaning that the Parabolic SAR looks to define where the market trend stops and reverses. The indicator plots a dot either above or below price for every unit of period selected (eg 1hr chart would have a dot above or below each 1h bar).
In basic terms, when dots are below price, the Parabolic SAR is identifying an uptrend, and likewise, when they are above price they are identifying a downtrend. So how can you use it to enter and exit trades? We’ve got the actionable information for you!
Trading Forex With Parabolic SAR
Entering Trades With Parabolic SAR
The creator of the Parabolic SAR, J. Welles Wilder, recommended supplementing the indicator with the average directional index (ADX) indicator, to help avoid counter-trend trades or choppy markets, however for this tutorial we will just be looking at the Parabolic SAR.
First, identify the direction of the trend; is it an uptrend or a downtrend? An uptrend should be forming higher highs and higher lows, whereas a downtrend should be forming lower highs and lower lows. In an uptrend you should only be looking for buy signals and in a downtrend you should only be looking for sell signals.
In the example below we have identified an uptrend.
To confirm a buy signal wait for three bars to form and close with dots underneath them. This is then a buy signal from the Parabolic SAR. Waiting for three closed candles can minimise your risk/reward ratio, but also protects you from many false signals. Below is how this may look.
Finding Exits With Parabolic SAR
The Parabolic SAR can be extremely useful for Forex traders setting a stop loss, a trailing stop loss, or exiting a trade at the finish of a trend.
To set a stop loss using the Parabolic SAR place the stop loss below/above the Parabolic SAR on the trigger candle. To trail a stop loss, continue to move the stop in line with the Parabolic SAR of the previous bar. Below you can see an example of setting initial stop loss with the Parabolic SAR indicator.
Another way to use Parabolic SAR in exiting trades is to wait for the Parabolic SAR to give a contradicting signal. In a buy trade this would be a dot above price, and in a sell trade it would be a dot below price. An example is shown below.
As always, we recommend conducting your own backtesting and research to gain expectations of strategy performance. Used alone the Parabolic SAR generates many signals, however when supplemented with other indicators or chart and candlestick patterns it can be a highly useful indicator to support forex traders.