How to Use The Parabolic SAR Indicator

 

How to Use The Parabolic SAR Indicator


Use the Parabolic SAR Indicator


When a trend develops, it may produce some of the most significant changes in the financial markets. Once a trend has established itself, it is common for it to outlast conventional estimates for how long it will last, allowing only the most talented traders to benefit to their full potential.

Being able to accurately analyse market trending states is therefore an incredibly important skill, which is why there are so many different instruments that seek to do so. The parabolic SAR indicator will be examined in this article as one of the primary indicators in the field.

Parabolic SAR Indicator Explained

The Parabolic SAR, or Parabolic Stop and Reverse, not only helps you identify trends, but it also advises you when to close out your trade and reverse the direction, as the name implies. Doesn't it appear to be rather useful?

J. Welles Wilder, a commodities trader and a tremendously renowned technical analyst, devised a number of trading strategies, including the parabolic SAR.

In his book 'New Concepts in Technical Trading Systems,' he established several of the contemporary technical analysis methodologies' pillars, such as the Average True Range (ATR), the Relative Strength Index (RSI), and what he dubbed the 'parabolic time/price system.

On a price chart, the indicator draws a curved pattern representing the likely stop and reversal levels. The form of this pattern reminded Wilder of the traditional parabolic curve.

How to Use The Parabolic SAR Indicator


Parabolic SAR Calculation

These are calculated using the following parabolic SAR formula:SARNEW = SARCURRENT + AF x x x x x x x x x x x x (EPCURRENT - SARCURRENT)
The following are the definitions for the formula terms:

AF = Acceleration Factor - a variable figure that rises in defined increments each time the the trade reaches a new high (for long positions) or a new low (for short positions). Wilder claimed an initial value of 0.02 for AF, which would subsequently grow in 0.02 increments until reaching a maximum value of 0.20.EP stands for Extreme Point, which is the highest or lowest price observed during the current trend (maximum for an uptrend, minimum for a downtrend).

According to Wilder , a trend market will have a chance to stay inside the graph curve. If the price fails to do so and instead breaks through the curve, the trend is likely to have lost pace.At such times you have to stop and reverse direction.
Understanding how the Parabolic SAR indicator works, what the various parameters signify, and how to change its use will help you grasp how it works.
However, keep in mind that, while knowing this information is beneficial, you do not need to worry about performing the calculations yourself!This is because the trading platforms for MetaTrader 4 (MT4) and MetaTrader 5 (MT5) will process the Parabolic SAR.




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