The MT4 installation package includes an indicator called the Parabolic SAR. It can hardly be called one of the most widely used tools but if used correctly, it can be of great help to a trader. In fact, experienced Forex traders often use the PSAR not only as an additional, but also as the main indicator when developing their trading behavioral strategies.
In this article, we will discuss the main advantages of using the Parabolic SAR, how to use it correctly, and useful tips for improving the efficiency of each trading day of the trader.
The Parabolic was developed by one of the geniuses of the last century about 50 years ago. It can be safely considered a trend-based tool. It is displayed on the chart as a series of markers that go above or below the price.
If the markers are above the price, we have a downtrend, and if below it, there is an uptrend.
The main advantage of the Parabolic SAR is not only the ability to track the trend but also to identify turning points. To “catch” a trend at the time of its formation, all you need to do is closely follow the indicator. The candlestick along which the markers move is a reversal one.
As mentioned above, the Parabolic SAR is integrated into MT4, and to activate it, you just need to select this option on the MT4 control panel. As for the configuration, it can be set both immediately after the launch of the indicator, and later, simply by right-clicking on it.
The Parabolic SAR has only two configurable settings: the step and maximum values. The smaller they are the greater the distance between the price and the markers. When setting the values, experienced users recommend keeping the ratio 1 to 10. In this case, it will be much easier to trade with the indicator because its signals will be more informative.
A distinctive feature of Parabolic is its flexibility when combined with other indicators, although it can also be used alone.
If you use only Parabolic SAR, there are a few rules to follow:
1. If the indicator marker was below the price and then moved above it, you should buy the asset.
2. If the indicator marker was above the price and then moved below it, you should sell the asset.
It should be remembered that the PSAR very often gives false signals or simply lags. For example, a marker can move on the chart at the moment when most of the movement has already been made. If this is not taken into account, traders risk opening many unprofitable trades and blowing up their accounts. That is why in order to develop an effective trading strategy it is important to combine the Parabolic with other indicators that can complete the picture in a timely manner, and protect against unwise decisions.
Although this indicator are not redrawn, the data of its last candlestick may change until it is closed, so only signals from candles with the close should be taken into account.
Many traders refuse to use the Parabolic SAR, believing that it is too complicated in terms of calculations, but if you test the indicator in combination with others, its advantages become evident and undeniable. Those are the following:
1. The ability to hold a position within a certain trend. As long as the curves are located at a relatively equal distance from each other, you can be sure of the strength of the trend, but once the distance between them starts to decrease, you should be ready for a trend change.
2. Universality. You can combine the PSAR with dozens of other math functions, using its signals both as main and supplementary source of information.
3. Multifunctionality. The indicator is suitable for determining both the most favorable time to enter the market and the right point to exit it.
4. There is nothing unnecessary. The dots on the chart are very easy to read and simple in terms of visual perception, so even beginners can use the Parabolic.
5. The indicator helps to set an objective Stop Loss.
6. Following signals from the Parabolic, traders protect themselves from trading against the trend, which is especially important for those who are just getting acquainted with the financial market and not ready for an aggressive behavioral strategy.
However, to fully understand the specifics of trading with the indicator, it is important to test it on a demo account. Remember that all responsibility for decisions made during trading sessions always rests with the trader, so do not neglect the opportunity to set a Stop Loss and follow the basic rules of money management while trading.
Parabolic signals are generally very informative if interpreted correctly, but they all lose efficiency in the case of a sideways trend.
If you doubt the effectiveness of the indicator and are afraid that your experience and knowledge will not be enough to make the right decisions, we recommend that you pay attention to algorithmic trading methods. In particular, there are many Expert advisors that automatically manage traders' investments, entering only potentially profitable trades and protecting traders from rash actions.
One of the most effective solutions is the combination of the Parabolic SAR and ADX indicator. Their ability to complement each other is obviously due to the fact that these indicators were created by the same person.
In this duo, Parabolic acts exclusively as the main tool capturing signals, while the task of ADX is to filter these very signals and confirm their reliability.
When analyzing the market with these two auxiliary indicators combined, you should use only the data of the red and green ADX bands, as well as Parabolic markers. Entry signals are the following:
1. If the red line is below the green one, and the markers start moving from top to bottom, you need to open a buy position.
2. If the red curve is above the green one, and the markers are above the price, you should open a sell position.
The PSAR can also be used to determine the best time to exit a trade. For example, many traders set a Stop Loss at the level of the markers, moving it manually until the position is closed. In this case, you can effectively apply the indicator not only for trading currency pairs, but also for CFD transactions, BTC, ETH and other virtual coins.
The combination of the PSAR, Stochastic Oscillator and EMA is also very informative and effective. In this case, it is worth going short if the following conditions are met:
1. The price falls below the EMA level.
2. Parabolic markers move to a level above the current price and hold the position.
3. The Stochastic fast line crosses the maximum set level from top to bottom.
Accordingly, you open a buy position if the opposite conditions are met. It is worth noting that the use of this strategy is most relevant on the H1 timeframe or higher. As for the asset used, any common currency pair with high liquidity will do. On small timeframes, Parabolic gives too many false signals, overreacting to the slightest market noises.