Parabolic SAR Indicator Guide
The MT5 Parabolic SAR is a default MetaTrader indicator created by J. Welles Wilder in order to identify the potential direction of a financial asset. To explain, the goal of this indicator is to determine where the trend ends. Thus, identifying new trends. However, SAR is an abbreviation for Stop And Reverse trading strategy. Also, The parabolic SAR indicator for MT4 charts can provide Forex traders with entry and exit points. To do so, its author J.Welles Wilder recommends finding the market direction by using the parabolic SAR dots strategy effectively and then measuring the strength of the move. However, the TradingView parabolic SAR indicator mainly works in trending markets.
PSAR Indicator FAQ
What is parabolic SAR indicator ?
The strategy that we want to apply to Parabolic SAR ( PSAR ) is mainly a trend-trading strategy. That is to say, we use this strategy to Identify a certain trend. So, the main goal of the PSAR strategy is to forecast tendency continuations and possible tendency reversals. To clarify, if the parabolic dots appear under the candlestick chart, we should follow the bullish movement. And keep our long position open. Besides, if the parabolic dots appear on the top of the chart, we should follow the bearish movement. And maintain our short trade open. So, the parabolic SAR strategy follows the dot position on the chart.
Stops and Reverses
The Parabolic SAR strategy has very simple speculation that gives insights into stops and reverses. To explain, if prices fail below the parabola during an upside move, this would signal a likely reversal. In other words, the general uptrend movement has reached its ending. Alternatively, when prices break above the same parabola during a downside move, this could signal a potential reversal. That is to say, the downtrend movement has reached its end. Thus, many Forex chartists employ the later breakthroughs either as entry points towards the beginning new trend or as stop orders of the ending trend. In conclusion, the parabolic SAR indicator is useful to identify new movements and to place stops at their ending also.
What do Parabolic Sar dots indicate ?
The parabolic SAR indicator appears in the chart as a set of dots that take place near the bars to indicate the market direction. On the one hand, the dots appear either below the price chart when there is an up-trend. Consequently, a buy signal appears. Alternatively, they appear above the price chart when there is a down-trend. Therefore, a sell signal materializes. Moreover, a change in the direction of the dots generates trade signals that can often produce profits. This happens when the asset price makes large fluctuations. Nevertheless, the PSAR is not significant in a flat or ranging Forex market. In short, when prices increase, the parabolic dots arise at the bottom. The pace increases or decreases with the trend. This indicator may produce wrong signals when the price is moving sideways. In this case, traders should anticipate small gains and losses.
How do you use the indicator effectively ?
To simplify the explication, we will call dots under the chart, green dots. Because they indicate an up-trend. Likewise, we will call dots above the chart, red dots. As they indicate a down-trend. Now, if a series of green parabolic dots gets interrupted by one or two red dots, it could mean a change in price movement. Here, we need to close our long position and start a short one. On the other hand, when red parabolic dots get interrupted by one or two green dots, it would most likely indicate a movement reverse. Here, we should close our short position and initiate a long one. Furthermore, to confirm the price movement or the potential price reversal, we can use other technical indicators alongside parabolic SAR. The best trading tools that work with PSAR are the relative strength indicator, the average directional index, and MAs.
What are the best parabolic stop and reverse settings ?
The PSAR indicator is calculated as shown below:
- Up tendency: Parabolic SAR = Prior Parabolic SAR + Prior A Factor [ Prior Extreme Point – Prior PSAR ]
- Down tendency: Parabolic SAR = Prior PSAR – Prior Acceleration Factor [ Prior Parabolic SAR – Prior E Point ]
Where:
- EP [ Extreme point ] = Highest high for an up tendency and lowest low for a down tendency
- AF [ Acceleration Factor ] = Default of 0.02, advancing by 0.02 each time a new Extreme Point is achieved.
This is an example of the default settings on the Parabolic SAR MT5 indicator.
Two settings compose this indicator that are the Acceleration Factor ( AF ) and the Maximum Acceleration ( MA ). In default settings, AF equals 0.02 and MA equals 0.2. Increasing the value of the Acceleration Factor will make the indicator tracks the price more closely. This means that more signals will appear and more reversals will be identified. By decreasing this parameter, the indicator will move slower, which will generate fewer reversals and dot signals. The Maximum acceleration MA has a small impact on the way the indicator behaves. It limits how quickly the indicator accelerates during a strong price move. Also, it ranges between 0.2 and 0.8.
Short-term investors who prefer to enter and exit trades quickly can use a higher acceleration factor. And that is because even small reversals will be identified. A longer-term investor who wants to maintain his position can decrease the acceleration factor in order to focus on the overall general direction.
Download Parabolic SAR indicator for MT4
The Parabolic SAR MT4 indicator is well known in forex trading in Metatrader 4. Traders use this tool to trade with movement direction. PSAR creates a parabola on the chart. The parabola is always below the price in an uptrend and above it in a downtrend. Also, chartists use it to identify points of stop and reverse (SAR). This tool is very popular and can be used for day trading, short-term swings, and scalping. It works with all timeframes and currency pairs. The Parabolic SAR indicator exists by default in the trend_subgroup in the MT4 terminal. Below, you can learn how to apply the parabolic Sar indicator on your MT4 chart.
Download Parabolic SAR indicator for MT5
The Parabolic Sar MT5 indicator analyzes trending markets in Metatrader 5. The indicator takes place above and below the price chat. PSAR interpretation is similar to The Moving Average. The difference is that PSAR moves with higher acceleration. Also, it can change its position accordingly to the price without having to cross it. Forex traders should follow the movement of this parabolic Sar indicator to initiate positions in the same direction in MT5. Also, this tool can generate high profits when the trend is strong. Meanwhile, its role will become limited when the market is choppy.
Download Parabolic SAR indicator for Tradingview
The Parabolic SAR Tradingview indicator helps traders to spot dots that specify probable stops and reverses. Most traders set the stop-loss orders at the parabolic SAR value. Furthermore, a move beyond this value would signal a movement reversal. Which will make the trader anticipate this move. When the movement is sustained upwards or downwards, the PSAR dots will be far enough from the price chart. This will enable the trader to ride the trend and seize profits. The subsequent screenshot demonstrates a parabolic Sar application of the indicator on a Tradingview chart.
Conclusion
Parabolic SAR is a great compact indicator that provides good information. It helps to determine the direction of the price activity. Traders use this indicator to determine entry and exit points. This strong indicator works well when combined with other tools. A good choice would be MAs, RSIndex, or ADIndex. In a strong trending market, PSAR will produce good results. However, it will produce many false signals when it is moving sideways.