Parabolic SAR: Points of the Trend
The Parabolic SAR is the technical indicator used by traders to predict the trend direction along with entry and exit points. Although it provides easy-to-read signals, it hides many pitfalls that should be considered when trading. Let's define when you should use this technical tool.
What Is a Parabolic SAR Indicator
Parabolic SAR (PSAR) is a technical tool used by traders worldwide that reflects the security's direction. SAR stands for stop and reversal. The indicator is widely used to show the current trend, signal a market reversal, providing entry and exit points.
Parabolic SAR is a technical tool that reflects the asset's direction.
Welles Wilder Jr. created this instrument. If you are familiar with the RSI (Relative Strength Index) indicator, you’ve heard this name for sure. The RSI is one of the easiest, most widely used indicators. This fact should persuade you to keep reading about the PSAR indicator.
How to Recognize Parabolic SAR
PSAR consists of dots that move in the price direction. As it's a trend indicator, it is located on the price chart, not in the window below. If there is a bearish trend, the dots are above the candlesticks and move downwards. Imagine they put pressure on the price, forcing it to move down. If the trend is bullish, dots are below the candles and move up. To remember that, imagine dots support the price, pushing it upwards.
How to Set Up Parabolic SAR in MT4
Parabolic SAR is a standard tool in the MetaTrader platform. It means you can quickly implement it on your price chart without additional downloads.
Parabolic SAR is a standard tool in the MetaTrader platform.
Click "Insert" in the upper panel of the trading platform, then "Indicators." Choose "Trend"; and the Parabolic SAR will be on the list.
The indicator has only two settings. These are step and maximum. Their default values are 0.02 and 0.2, respectively. A step is the size of the acceleration factor. The acceleration factor starts with this value and then increases by the step size with each new high for an uptrend (or low for a downtrend), up to the amount defined by the “maximum” parameter.
You can try other parameters for the indicator, but the standard ones suit basic trading strategies best.
Parabolic SAR Formula
Although the indicator is set automatically, to understand how it works, you should know the Parabolic stop and reverse formula.
The indicator is set automatically and has a perfect default setting that will suit any trading strategy.
To get the uptrend's dots, you need to subtract the prior Parabolic SAR from the prior extremum (higher high in the uptrend and lower low in the downtrend). The result should be multiplied by the previous acceleration factor (the standard is 0.02, which rises each time a new extremum forms by 0.02, maximum is 0.20). The result should then be summed with the prior Parabolic SAR.
Parabolic SAR = Prior Parabolic SAR + Prior acceleration factor (Prior extremum - Prior Parabolic SAR)
For the downtrend, the formula looks similar. However, you need to extract the prior extremum from the prior PSAR indicator. The result should be multiplied by the preceding acceleration factor. Another difference is that you need to subtract the result from the prior parabolic SAR, not find their sum.
Parabolic SAR = Prior Parabolic SAR - Prior acceleration factor (Prior Parabolic SAR - Prior EP)
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