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Learn Forex Trading > Day 6 Class  ( Common Chart Indicators ) > Parabolic SAR
Parabolic SAR
Parabolic SAR is used for creation of closing orders and trailing stop orders. SAR means stop-and-reversal.

Methods of usage

* Long positions should be closed when price falls below SAR line.
* Short positions should be closed when price rises higher than SAR line.
* Each point of SAR defines the level of stop-order on the current & not the following trading period (day, hour, etc.) The importance of the trend cannot be overestimated when you are participating in the forex market as a forex trader. Identifying a trend early can help you earn a tidy profit. In the same way, identifying when the market is bucking the trend can help you avoid a huge loss.

What’s the Parabolic SAR indicator?

The word SAR stands for “Stop And Reverse” and this name clearly indicates the functionality of the indicator.

The Parabolic SAR indicator follows the trend and stops when the trend near to reverse.

The above sentence telling us all about the Parabolic SAR indicator:

1- The trend must be exist first before relying on the Parabolic SAR; which means the Parabolic SAR works perfectly in the trending markets and times while it works very bad when the market start to move sideways.

2- The Parabolic SAR indicator has no answer for the questions “When to enter the market?” and “Is the market trending or not?” but it has a very good answer to one of the most important questions “When to exit the trade?”.

Formula:

The Parabolic SAR indicator in MetaTrader takes two of the parameters that used in its calculation (Figure 2):

Step: This is the acceleration factor used in calculating the Parabolic SAR, The higher the Step value is set, the more sensitive the indicator will be to price changes. Wilder recommends setting the Step parameter to .02.

Maximum: This is the value of reverse when the Parabolic SAR reach it. Wilder recommends setting the Maximum to parameter to.20.

The calculation of indicator then uses one of two formulas depending on is it long or short position:

Long:

SAR(i) = SAR(i-1)+Step*(HIGHEST(i-1)-SAR(i-1))

Short:

SAR(i) = SAR(i-1)+Step*(LOWEST(i-1)-SAR(i-1))

How to use the Parabolic SAR indicator?

The main usage of the Parabolic SAR indicator is as a trailing-stop technique which means the Parabolic SAR will tell you the best time to exit your trade by giving you the best value to trail your stop losses.

At the beginning of the trend the Parabolic SAR dotes are far from the price hence there’s a room for your trailing stop to be wider. As the trend goes weaker the Parabolic SAR dotes come near to the price and you’ll have a tighter trailing stop.

When the Parabolic SAR dotes goes below the price you use its value to trail stop your long position.
When the Parabolic SAR dotes goes above the price you use its value to trail stop your short position.

Use Parabolic SAR Indicator To Analyse Forex Trading Trends

As is always the case with forex trading, anything that can help you either earn a lot or save a lot will never be easy to understand and implement. We always tend to believe that good things keep on happening once they start.

The same applies to bad things as well. Once the market starts falling, the forex trader presumes that it shall keep falling. This consistent movement in a particular direction is a trend.

Trends analysis is very important as far as future forex trading is concerned. If you misread the trend, making the wrong trade in future forex trading can leave a big hole in your pocket.

Trend analysis is a highly complex task and you will have to rely on forex trading tools to ensure you do not suffer a loss on your trade.

This is where the Parabolic SAR indicator helps the forex trader. You must have studied the parabola in your math class at school. This indicator is at technical analysis tool which, presuming the trend shall continue, will indicate the level at which the market shall meet support or resistance.

The potential benefits of this tool combined with other tools like automated forex system trading for future forex trading is very high. To help novice forex traders understand this concept better, experts often liken this tool to a warning indicator.

As long as the trend continues its momentum, the warning light will not flash. However, the moment the market bucks the trend and crosses the limit identified by the tool; it is time for the forex trader to revise his calculations.

This tool is important because it will help the trader differentiate between an aberration rise in a downward trend and a revival of the forex market at large. Never rely on a single tool. Combine it with other tools like automated forex system trading to minimize risk.


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