The parabolic SAR deserves attention only as a part of a comprehensive trading strategy, not as a stand-alone tool. Parabolic SAR helps traders determine the future short-term momentum of a given asset. The Parabolic SAR stands for stop and reverse.
If used alone, it can be misleading and can cause a rushed decision to enter and exit the market. The parabolic SAR performs best in markets with a steady trend. Use it with other oscillators and indicators for making informed decisions. One of the popular strategies is the combination of the SAR strategy with ADX filtering available in the Pocket Option terminal.
Be careful with ranging markets because the parabolic SAR tends to whipsaw back and forth, generating false trading signals. Wilder recommended augmenting the parabolic SAR with the use of the average directional index (ADX) momentum indicator to obtain a more accurate assessment of the strength of the existing trend. Traders may also factor in candlestick patterns or moving averages. For example, a price falling below a major moving average can be taken as a separate confirmation of a sell signal given by the parabolic SAR.
How to set up the Parabolic SAR in the Pocket Option terminal?
First of all, add indicators to your terminals and choose a volatile asset for short-term trading. Keep in mind that you should choose currency pairs forming a full candlestick chart.
The recommended settings are:
- choose LTCBTC – this is the best asset;
- set the timeframe for 15 seconds and select the candlestick chart;
- add the ADX indicator and Parabolic SAR;
- set the Parabolic SAR period to 0.01.
ADX indicator reflects the strengths and volatility of the trends. It consists of indices:
Traders should follow the red and green lines. The yellow line points to the growth against the general background of decline.
How to read signals?
The parabolic SAR indicator is graphically shown on the chart of the assets as a series of dots placed either over or below the price (depending on the asset’s momentum). A small dot is placed below the price when the trend of the asset is upward, while a dot is placed above the price when the trend is downward. As you can see from the chart below, transaction signals are generated when the position of the dots reverses direction and is placed on the opposite side of the
Parabolic SAR can predict and show reversals when used with an ADX indicator. So, many traders will choose to place their trailing stop loss orders at the SAR value, because a move beyond this will signal a reversal causing the trader to anticipate a move in the opposite direction. In a sustained trend, the parabolic SAR is usually far enough removed from the price to prevent a trader from being stopped out of a position on temporary retracements that occur during a long-term trend, enabling the trader to ride the trend for a long time and capture substantial profits.
The signal for uptrend is a break in the SAR sequence: dots move down while the ADX goes up. The green line breaks over the red.
The dots move up and the red line drops down.
A partial break of the line from the SAR dots is a misleading signal. You should check it with 10-15 candles at a 15-second interval. If the signals are frequent and stay horizontal, you should pause and wait for a clear signal. The behavior of ADX lines also matters. For example, when the red and green lines are intertwined, it is not the best time to make decisions.
ADX curves reduce the number of false signals by 20%, while the remaining 30% can be handled by the reduced sensitivity of the indicator. Traders may also factor in candlestick patterns or moving averages. For example, a price falling below a major moving average can be taken as a separate confirmation of a sell signal given by the parabolic SAR.
The Parabolic SAR does an amazing job of finding support and resistance levels. The goal of the indicator is to provide you with a visual of where to exit your trading position. The indicator also has a price sensitivity, so as the stock accelerates, the indicator can weigh that movement accordingly. Also, unlike other indicators like oscillators that provide oversold and overbought readings, the Parabolic SAR is here to help you identify stops. While some traders will use it as a signal for both entries and exits, the tool’s primary purpose is to help you with where to stop the trade. So, if you are looking for a quick visual approach for top management, the parabolic SAR strategy is a great starting point.