By GoldenRebate Team
Have you ever wished you could tell when a trend in the forex market was likely to stop and reverse? The Parabolic Stop and Reverse (SAR) is an indicator designed to do just that. In this post, we’ll explore the Parabolic SAR and teach you how to use it.
How The Parabolic SAR Works
The Parabolic SAR typically plots dots or points on a currency pair’s chart that indicate potential areas where price action might reverse.
When a forex chart is in an uptrend, the dots plotted by the Parabolic SAR are typically below the candles. When the currency pair is in a downtrend, the reverse is true. The dots usually appear close together whenever the trend is consolidating, while they are further apart in a strong uptrend or downtrend.
Note: The Parabolic SAR only works in trending markets. Do not use it in choppy or sideways markets — these conditions typically generate a lot of false signals.
How To Enter And Exit Trades Using The Parabolic SAR
You can use the Parabolic SAR to time your entries and exits when a trend is about to reverse. For example, when a major uptrend is about to reverse, the Parabolic SAR will typically form at least three dots above the candles to indicate that a downtrend may be beginning. In such a case, you should exit your long trade and enter a short trade.
In cases where the prevailing trend is a downtrend, the Parabolic SAR will typically form at least three dots below the candles to indicate that an uptrend may be about to begin. In such a case, you should exit your short trade and enter a long trade.
Using The Parabolic SAR As A Trailing Stop
Some traders prefer to place their trailing stop loss orders at the level where a SAR dot appears within an established trend. In most cases, this approach will rarely stop you out in a market with a strong uptrend or downtrend, but will provide protection if the trend unexpectedly reverses. This can be a particularly useful feature for new traders who aren’t yet familiar with setting trailing stop losses.
Note: This does not work in ranging markets where the SAR typically whipsaws between positions.
Adjusting The Step (Acceleration Factor)
The sensitivity of the Parabolic SAR is determined by the Acceleration Factor (AF), also known as the Step. The default acceleration factor is 0.02, but most charting programs allow you to adjust this figure.
- Lower the step → moves SAR further from price → fewer signals, less sensitivity
- Raise the step → moves SAR closer to price → more signals, more sensitivity
The step has a minimum value of 0.01 and a maximum value of 0.20. When adding the Parabolic SAR to a chart, two values are required: the step and the maximum step. The step value carries more weight in determining reversals.
Conclusion
The Parabolic SAR was originally designed to analyse trends lasting two to three weeks. However, it can be used on trends of any duration. We recommend experimenting with different values for the step and maximum step to identify the settings that allow you to ride a trend for the longest period.
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Frequently Asked Questions (FAQ)
What is the Parabolic SAR indicator?
The Parabolic SAR (Stop and Reverse) is a trend-following indicator developed by J. Welles Wilder. It plots dots above or below price candles to indicate the direction of the trend and potential reversal points.
How do I read Parabolic SAR signals?
When the dots appear below the price candles, the market is in an uptrend and you should look for buying opportunities. When the dots appear above the price candles, the market is in a downtrend and you should look for selling opportunities.
What is the best setting for Parabolic SAR?
The default settings are a Step (Acceleration Factor) of 0.02 and a Maximum Step of 0.20. These work well for most traders. Lower the step for fewer but more reliable signals, or raise it for more frequent signals.
Can Parabolic SAR be used for stop loss?
Yes. Many traders use the Parabolic SAR as a trailing stop loss by placing their stop at the level of the most recent SAR dot. This helps lock in profits as the trend continues while protecting against unexpected reversals.
What are the limitations of Parabolic SAR?
The Parabolic SAR performs poorly in sideways or choppy markets and generates many false signals. It works best in strongly trending markets and should always be combined with another indicator such as ADX or RSI to confirm trend strength.
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