Good afternoon, dear traders and guests of the FxCash rebate service blog. We continue to acquaint you with technical analysis indicators and strategies based on them. Today we will talk about the classic Parabolic SAR indicator, which is among the basic tools of most platforms. If for some reason you did not find it in the list of your tools, we are ready to send its template to you for free by email. Just write about it in the comments.
Parabolic SAR: the essence and application of the indicator
Parabolic SAR appeared much later than another equally well-known stochastic indicator. If the formula for the stochastic oscillator was derived in the 1950s, this indicator was first described in 1976 in his book by the financier Wells Wilder. In part, its formula is similar to the moving average, but there is a significant difference: it moves with acceleration, the coefficient of which is specified in the code, and can move in a vertical plane relative to the price (be above or below it). The formula for calculating the indicator takes into account the acceleration factor (Acceleration), the Parabolic SAR value on the previous candle, the MAX and MIN price for the previous period.
Initially, when creating the indicator, the goal was to create a tool without lag. The result was a certain analogue of the oscillator, which shows the potential moments of reversal. If Parabolic SAR points are located below the price, the trend is up, if above the price – falling. The closer the location of points to the price line, the greater the likelihood of a reversal. The indicator is used exclusively in an active market, in the flat it practically does not work.
Trading conditions of the strategy based on ParabolicSAR:
- Timeframe – H1.
- Asset – EUR / USD, GBP / USD.
- Parabolic SAR settings: step – 0.02, maximum – 0.2.
How to open a long position:
- Parabolic SAR changes its position from a falling trend to a growing one, that is, changes its position “above” the price to the position “below” the price.
- Candle 1 on the rising indicator (above the price) is ascending.
- Candle 2 on the rising indicator is falling.
- MAX of the second candlestick is located below the MAX of the first candlestick.
After the second diminishing candlestick closes and Parabolic SAR remains above the price (ascending), we put Buy Stop on the level of the maximum value of the first candle + 3-5 p. The target profit value is 20-30 p., the length of the safety stop – 40-60 p.
How to open a short position:
- Parabolic SAR changes its position from a growing trend to a falling one, that is, changes its position “below” price to position “above” price.
- Candle 1 on a falling indicator (below the price) is declining.
- Candle 2 on the falling indicator is ascending.
- MIN of the second candlestick is located below the MIN of the first candlestick.
After the second rising candle closes and Parabolic SAR remains below the price (falling), we put Sell Stop at the level of the minimum value of the first candle minus 3-5 p. The target profit value is 20-30 p., the length of the safety stop – 40-60 p.
At the time of publication of statistics from the opening of the transaction is better to refrain. Signals appear relatively rarely, therefore, selecting a timeframe, you can work with several assets at the same time or use tactics as an additional one. Ask questions in the comments!