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Parabolic SAR Indicator
The Parabolic SAR Indicator is a forex technical analysis tool used to trade with the trend direction, but also to identify points of potential stops and reverses. In fact, the SAR abbreviation in Parabolic SAR stands for “Stop and Reverse”. The indicator is made of dots that flow above or under the price. When these dots of Parabolic SAR hover above the price, they indicate a bearish trend. Conversely, when dots of Parabolic SAR immerse below the price, they indicate a bullish trend. This forex gauge became very popular and can be used for scalping, day trading, and short-term swing trading.
The Parabolic SAR Indicator fits all kinds of timeframes and currency pairs. It is displayed directly on the main trading chart. The default settings can be modified directly from the input tab. Feel free to experiment with the settings and parameters to fit your personal preferences.
A Bit of History
J. Welles Wilder developed the Parabolic SAR (SAR) and introduced it to the world in his book New Concepts in Technical Trading Systems. The book was published in 1978 and also featured several other indicators, which are now considered classic indicators, such as: Relative Strength Index, Average True Range and the Directional Movement Index. Much like the indicators mentioned, the Parabolic SAR indicator is still widely used and has great importance in the world of technical analysis in forex and stock markets.
How does it work? How to apply in trading?
Trading Rules Explanation
As we mentioned in the beginning, the Parabolic SAR indicator signals are presented in the form of dots that goes above or below the price. If the price crosses Parabolic SAR lines, the indicator dots turn upside down, and its further values are located on the other side of the price. When such a turn takes place, the maximum or the minimum price for the previous period would serve as the starting point. When the indicator makes a turn, it gives a signal of the trend end (correction stage or sideway). The Parabolic SAR is also an incredible indicator for providing exit points. Long positions should be closed when the price sinks below the SAR line, and similarly, short positions should be closed when the price rises above the SAR line. It is often the case that the indicator dots serve as trailing stop points.
Follow these steps for a long trade:
- The Parabolic SAR turns below the price and displays green dot
- Buy trade is now triggered
- Set stop loss a few pips below the bigger green dot at triggering candle
- Take profit or exit trade whenever the Parabolic SAR provides opposite signal
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