Parabolic SAR Indicator in Forex Trading

Identifying market trends becomes easier with the Parabolic SAR indicator as it provides the ideal entry and exit signals in strong trending markets. You can also identify the price levels at which stop-loss orders can be placed. In this article, we take an in-depth look at Parabolic SAR.

What is the Parabolic SAR indicator in forex?

The Parabolic Stop and Reverse (SAR) indicator can determine the continuation and reversal in the currency pair prices. The ideal entry and exit levels are determined based on the price levels at which the indicator stops and reverses. These appear as dots in a price chart, below and above the currency pair prices.

When the Parabolic SAR dot is below the currency pair price, it indicates an uptrend and signals to long the trade.
When the Parabolic SAR dot is above the currency pair price, it indicates a downtrend and signals to short the trade.

How to calculate the Parabolic SAR indicator?

The Parabolic SAR indicator can be calculated by identifying if the multiple dots are rising in an uptrend or falling in a downtrend.

Analyse the currency pair price chart in the previous five periods at the very least or more.
Record the high and low price levels in these five or more periods.
When the currency pair price is rising, use the lowest low price level in these five periods as the preceding/prior Parabolic SAR value. However, if the currency pair prices are falling, use the highest high price level in the last five periods as the initial prior Parabolic SAR value.
Keep the Acceleration Factor (that helps determine the placement of the dots) in the formula as 0.02 at first and increase the value by 0.02 each time the currency pair price makes a new extreme high or low. Stop increasing the Acceleration Factor when it reaches a value of 0.2.
Track the high price, low price, SAR value, extreme price levels and the Acceleration Factor on a daily basis to identify ideal exit and entry levels. Rising Parabolic SAR = prior Parabolic SAR + [Acceleration factor (Prior extreme price level – prior Parabolic SAR)] Falling Parabolic SAR = prior Parabolic SAR – [acceleration factor (prior Parabolic SAR – prior extreme price level)] Where, Extreme price level = the lowest low in the falling market out of the considered period when calculating a falling SAR and the highest high in the rising market out of the considered period when calculating a rising SAR.

What does the Parabolic SAR indicator tell you?

The Parabolic SAR indicator tells the ideal buy or sell price levels through the positioning of the dots around the current price levels.

A buy signal occurs in a Parabolic SAR indicator when the dots constantly move from above the currency pair’s price to below it.
A sell signal occurs in a Parabolic SAR indicator when the dots constantly move from below the currency pair’s price to above it.

The Parabolic SAR indicator also provides traders with ideal stop-loss or trailing stop levels.

When the currency pair prices are rising along with a rising value of the Parabolic SAR indicator, the exact value of the Parabolic SAR can be used as a stop-loss level to exit the long order.
If the currency pair prices drop below the value of the Parabolic SAR, this exact level can be used as a confirmation signal to exit the trade right away since the downtrend is confirmed.

How to trade using the Parabolic SAR?

You can trade the forex market using the Parabolic SAR and identifying the placement of the dots near the currency pair prices.

Identify the first red dot that occurs right after multiple green dots to determine a bearish reversal signal in the market. This indicates to traders the end of a bullish market and the beginning of a bearish market.
At this point, traders can exit the market or open short positions to trade the falling markets.
After the market has been in an uptrend for a long period of time, identify the first green dot that occurs right after multiple red dots, indicating a bullish reversal signal. This indicates to traders the end of a bearish market and the beginning of a bullish market.
At this point, traders can enter the market or open long positions to trade the rising markets.

Top Parabolic SAR trading strategies you should know

Parabolic SAR Scalping Strategy

The Parabolic SAR scalping strategy can be used by scalpers to identify the ideal entry and exit price levels with the help of one short timeframe and one long timeframe chart. Let us consider the short timeframe chart to be a one-minute chart and the long timeframe chart to be a 15-minute chart. The long-term timeframe chart will show you the current trend in the market, and you can apply the Parabolic SAR strategy to this timeframe to get a forecast about the future market direction. By applying the same Parabolic SAR strategy to the short-term timeframe, you can confirm if the trade direction forecasted in the long-term timeframe chart is providing accurate results. When both charts provide the same market direction, you can place long orders in a continued uptrend or short orders in a continued downtrend.

Parabolic SAR Breakout Strategy

The Parabolic SAR indicator can also be used to identify breakout in the market. Whenever the Parabolic SAR moves to the other side of the currency pair price chart, it signals traders about a potential breakout or trend reversal. When the Parabolic SAR enters a downtrend after a continued uptrend, it signals a bearish reversal where you can exit a trade or place short orders. When the Parabolic SAR enters an uptrend after a continued downtrend, it signals a bullish reversal where you can enter a trade or place long orders.

Double Parabolic SAR Strategy

A Double Parabolic SAR Strategy takes into consideration two different timeframes to identify the ideal entry or exit levels in a continued or reversal trend. The longer timeframe in this strategy shows the market’s strong trend direction on the basis of the direction the Parabolic SAR is trending in. After identifying the long-term trend, traders can move to the short-term timeframe to place trades according to the same. All trades are placed based on the long-term timeframe as it increases the possibility of successful trades.

Parabolic SAR Moving Average Strategy

Combining the Parabolic SAR strategy with Moving Average can confirm the trend direction. Consider a short-term and long-term moving average and insert it into the price chart that already has the Parabolic SAR indicator applied. When the short-term Moving Average (20-period) crosses the long-term Moving Average (40-period) from below, and the Parabolic SAR dots are above the currency pair’s price and this cross, it signals a strong downtrend continuation. This helps traders exit the trade or open short positions to trade the falling markets. When the short-term Moving Average crosses the long-term Moving Average from above, and the Parabolic SAR dots are below the currency pair’s price and the cross, it signals a strong uptrend continuation. This helps traders enter the trade or open long positions to trade the rising market.

Parabolic SAR RSI Strategy

The Parabolic SAR and Relative Strength Index (RSI) helps traders understand the market momentum and future market direction based on overbought and oversold market levels. The Parabolic SAR takes into consideration the RSI values of the time period we want to trade in, instead of the high and low values trading during that time. By doing this, the market trend direction that we will find will be a confirmed trend as the RSI will help in eliminating overbought and oversold trending bias.

Whenever the current RSI value in the period considered is higher than the value for the current Parabolic SAR, but the previous RSI value is below it, traders will receive a signal to long the trade. At this point, the current value of RSI must be equal to or below 35% to confirm the uptrend after an oversold market.
Whenever the current RSI value in the period considered is lower than the value of the current Parabolic SAR, but the previous RSI value is above it, trade receives a signal to short the trade. At this point, the current value of RSI must be equal to or more than 65% to confirm the downtrend after an overbought market.

How to use the Parabolic SAR Indicator in MetaTrader?

It is easy to use the Parabolic SAR indicator on MetaTrader as all you have to do is go to the MT platform and open the MT4 or MT5 terminal, click on ‘Insert’, then select ‘Trend’ and add the Parabolic SAR indicator. These three simple steps will add the indicator to your trading chart and help you trade on MT4 or MT5 with Parabolic SAR. In the ‘settings’ window that pops up right after you select Parabolic SAR, you can change the settings as per your trading preferences. Use a higher setting if you wish for a tighter stop-loss order and lower settings if you want stop-loss orders that are not so rigid. The best Parabolic SAR settings depend on your specific trading requirements.

Parabolic SAR indicator settings

Parabolic SAR indicator settings can be changed as per your personal trading preference. All you have to do is move your cursor over the currency pair price chart and click on the Parabolic SAR indicator appearing in the upper left corner. As the Parabolic SAR settings will appear, you can adjust the setting accordingly. The indicator comes with two different settings, the Acceleration Factor and the Maximum Acceleration. The Acceleration Factor’s default value is 0.02 and the Maximum Acceleration value is 0.02. You can increase the value of the Acceleration Value if you want to track the prices more closely and decrease the difference between the indicator’s value and currency pair price. By doing this, you will be able to identify more price signals and reversals. When you decrease the value of the Acceleration Factor, you make the indicator produce a slower result as you increase the difference between the currency pair price and the indicator, resulting in fewer trading signals and reversals. The Maximum Acceleration is set to determine the speed of the indicator and how fast it can accelerate during a strong trend. When you change its value, it does not have much impact on the Acceleration Factor.

If you are a short-term trader, you can choose a higher Acceleration Factor value to receive more signals helping you enter or exit a trade quickly.
If you are a long-term trader, you can choose a lower Acceleration Factor value to receive fewer signals helping you enter or exit a trade only with more significant price moves.

Trade with the Parabolic SAR indicator and track reversals

The Parabolic SAR indicator helps traders with trading signals before the markets change direction. Combining the Parabolic SAR indicator with other technical indicators like Moving Averages or RSI confirms trading signals and helps traders place successful orders. Start trading with Blueberry. forex trading platform to get a seamless trading experience with additional features and technical tools. Sign up for a live trading account or try a demo account.

Disclaimer:

All material published on our website is intended for informational purposes only and should not be considered personal advice or recommendation. Traders should carefully consider their objectives, financial situation, needs, and level of experience before entering into any margined transactions.

What is the Parabolic SAR indicator?