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.
ATTENTION!
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.