Parabolic SAR – What It Is & How to Trade with It

Parabolic SAR – What It Is & How to Trade with It

What is the Parabolic SAR?

The Parabolic Stop and Reverse (Parabolic SAR) is a trend-following indicator developed by J. Welles Wilder to help traders identify trend direction and reversal points. The indicator appears as a series of dots plotted above or below price, signaling potential entry and exit points.

The Parabolic SAR is calculated using the formula:
SAR = Prior SAR + (Acceleration Factor × (Extreme Point – Prior SAR))

Where:

• Prior SAR = Previous Parabolic SAR value.
• Acceleration Factor (AF) = Starts at 0.02 and increases by 0.02 per new high/low, up to 0.20.
• Extreme Point (EP) = Highest high (for uptrends) or lowest low (for downtrends) reached in the trend.

Key Features of Parabolic SAR

• Identifies trend direction with visually clear signals.
• Indicates potential reversal points.
• Works well in strong trending markets.

How to Use the Parabolic SAR in Forex Trading

1. Trend Identification Strategy

• Bullish Trend: When the Parabolic SAR dots are below the price.
• Bearish Trend: When the Parabolic SAR dots are above the price.

Recommended Settings:

• Default AF: 0.02 (adjustable for sensitivity).
• Maximum AF: 0.20 (higher values increase responsiveness but may cause false signals).

2. Parabolic SAR Reversal Strategy

Traders use SAR dot flips to identify trade opportunities:

• Buy Signal: When the dots move below the price, indicating an uptrend.
• Sell Signal: When the dots move above the price, indicating a downtrend.

3. Parabolic SAR with Moving Averages

Combining Parabolic SAR with a moving average (e.g., 50 EMA) can help confirm trend signals:

• Buy when: Parabolic SAR signals an uptrend & price is above the 50 EMA.
• Sell when: Parabolic SAR signals a downtrend & price is below the 50 EMA.

4. Parabolic SAR with RSI Strategy

Pairing Parabolic SAR with the Relative Strength Index (RSI) improves accuracy:

• Buy when: Parabolic SAR signals an uptrend & RSI is below 30 (oversold).
• Sell when: Parabolic SAR signals a downtrend & RSI is above 70 (overbought).

Pros and Cons of Using Parabolic SAR

✅ Pros:

• Easy to use and interpret.
• Works well in trending markets.
• Provides clear entry and exit points.

❌ Cons:

• Generates false signals in ranging or choppy markets.
• Not as effective without confirmation from other indicators.

Final Thoughts

The Parabolic SAR is a simple yet effective trend indicator that helps traders identify trend direction and reversal points. When combined with other indicators, it enhances trade accuracy and improves risk management.