The Parabolic SAR system is a popular trend indicator that shows the point of a price reversal. It stands for “stop and reversal system,” which reflects how the tool functions. After it is activated, a dotted line figure consisting of separate dotted elements is formed on the trading platform chart.
The Parabolic SAR indicator is another development of Welles Wilder, who is a truly legendary personality in the world of trading. The system was introduced in 1978, in a book that looked at new technical analysis tools. Along with the Parabolic system, other popular indicators were also presented, such as ADX, the RSI oscillator, and the ATR index. They are also included in the range on the Binomo trading platform and are an excellent addition to the functionality.
Overview of the indicator
Parabolic SAR makes it possible to estimate current price deviation on the chart within a certain type of trend. When the price goes beyond the established boundaries, it leads to a change in the type of trend. A feature of the instrument is its duality, as there is no neutral intermediate position. This is not the case for most technical analysis indicators.
You can usually use technical analysis tools to recognize both directional trends (upward or downward) and horizontal trends, when the price moves in a narrow range and the market is calm. SAR indicates the points of trend reversal, skipping the intermediate position. However, the phase of a horizontal trend can be recognized through indirect signs, which will be discussed below.
On the Binomo trading platform, you can adjust its sensitivity. Decreasing the “Minimum AF” parameter from the standard value of 0.02 to 0.01 will improve the accuracy of signals and reduce how many there are. The second parameter “Maximum AF” does not really affect its sensitivity, so those values can be left at the standard level.
Trading on Parabolic SAR
The parabolic system generates one type of reversal signals. At this moment the price touches the points, after which they move to the opposite position. Up or down relative to the chart elements. The secondary signal is the intensity of candlestick deviation, as well as the number of reversals in a certain unit of time. Another important feature is the vertical spacing between elements. An increase in this indicates accelerated price movement and an imminent weakening of price momentum.
Parabolic SAR trading signals:
- on a decrease — white dots begin to form in a position above the candles.
- on an increase — the SAR dots start plotting under Japanese candlesticks on the chart.
The minimum duration of price movement after the formation of the signal is about 4-5 price bars on the chart. The optimal platform settings for beginners are as follows: 15-second time frame and 1-minute expiration for trades.
Recognizing a horizontal trend
Approximately 70% of the time, the market is in a neutral phase (horizontal trend), when there are no pronounced price fluctuations. This is an unfavorable period for trading due to a pronounced decrease in the accuracy of the trading signals of any indicators. And the formula for calculating the Parabolic system is designed in such a way that it does not have an intermediate phase. Therefore, when using this indicator, the trader must independently assess the market situation.
A characteristic sign of a flat (neutral trend) is too frequent reversal signals. If the reversal point was preceded by a long sequence of SAR dots, this is a favorable factor that increases the accuracy of the forecast. If there are frequent phase changes on the chart, it is not recommended that you enter the market.
The indicator is a trend one, so it is only effective for directional price movement. Often Parabolic SAR is used as the only tool for technical analysis. This is acceptable if you manually filter its signals and refrain from trading during a horizontal trend.
However, this tool is often used as an auxiliary signal filter in conjunction with other elements of a strategy. It works well with oscillators and trend indicators, including RSI and Moving Average. The Parabolic system can help you find the most favorable points to enter the market.
Caution! This article is not intended to be investment advice. No strategy can guarantee 100% correct trading results. A successful trading result in the past is not a guarantee that it will be repeated in the future. Any information contained in this article is for informational purposes only.