Binary Options Strategy: Parabolic SAR
Now, let’s take a look at the Parabolic SAR. We will describe the basics of Parabolic SAR and explain how useful the Parabolic SAR is to the analysis of market movements.
What is Parabolic SAR?
The Parabolic SAR (Parabolic Stop And Reverse) is a technical indicator. It is very useful to identify the large movements of the price of a financial asset. The Parabolic SAR was developed by J. Welles Wilder Jr., who has also created the RSI (Relative Strength Index). The above figure shows the Parabolic SAR which is displayed in red dots.
It is an effective method to identify the turning point of the trends. When the price of an asset follows a trend, the Parabolic SAR is very useful. It does not matter which direction you predict, as long as there is the trend, it is possible to make a large profit.
※ On the MetaTrader 4 interface, you can select Trand > Parabolic SAR
Learning How to Read Parabolic SAR
By looking at the Parabolic SAR, it is possible for a trader to identify the direction of an asset’s momentum and the turning points.
A buy signal
When the dots are placed below the price, it signals that it is an upward trend, i.e., a bullish trend.
A sell signal
When the dots are placed above the price, it signals that it is a downward trend, i.e., a bearish trend.
Signals of trend reversals
As shown in the above figure, one can identify the signals of trend reversals. Compared with other indicators, the Parabolic SAR can show the trend reversals in a more direct way. It can help novice traders to find out when is the best time to place a trade.
By using the Parabolic SAR, a trader can see whether it is an upward trend or a downward trend, and identify the trend reversals. Here, it is necessary to pay attention to the fact that there may be a few false signals in a small period of time. Thus, it is better to set to a long period of time when you want to determine the trend reversals.
Because the indicator can provide false signals, it is better to use the Parabolic SAR with other oscillator indicators to avoid false signals. The Parabolic SAR is very effective when the market is trending. However, it is not useful when the market is moving sideways.
Parabolic SAR Formula
It is calculated as:
SARn+1 = SARn + AF(EP – SARn)
- SARn represents today’s SAR values and SARn+1 represents tomorrow’s SAR values.
- EP (Extreme Point) is the highest value reached during an upward trend and the lowest value reached during a downward trend.
- AF is the acceleration factor and it is initially set to “0.02”.
※ Every time a new EP is recorded, it will be updated and increase by “0.005” and the maximum value of AF is set to “0.20”.
Identifying the Trends
In general, when three dots formed, it suggests trend reversals. If you use only one or two dots, it is very likely that you will make a wrong judgment. Therefore, it is important for you to remember that trend reversals cannot be determined unless three dots are formed.
As shown in the above figure, in a downward trend, two dots are formed at the bottom of the price. Here, three dots are not formed and the downward trend continues. If you decided to place a position at this time, it is very likely that you will lose the trade. Thus, it is necessary for you to pay attention to this issue.