Secrets of Optimizing Parabolic SAR

This time, I will try to review trading tricks using SAR and combine it with an indicator called ADX. Alright, without needing to drag on, let's just start.

What is SAR?

SAR stands for "stop and reverse" and is a trend following indicator designed to recognize "turning points" in price movements.

Parabolic SAR can be used for:

- Recognize trends

- Entry and exit strategies

- Trailing stop

Parabolic SAR is seen as a series of points seen above or below the price. When the trend tends to go up, these points are under price movements. Conversely, when trends tend to fall, these points are above price movements. These points follow price movements until one day the trend begins to change.

When a trend is almost over, usually the parabolic SAR moves stable near the price until the price touches the SAR point. Then the SAR point begins to form on the other side of the price movement. That is an early indication that prices are likely to change direction.

We can also use SAR as a trailing stop, that is, by moving the SL level above the last SAR point (if prices go down) or below the last SAR point that appears (if prices go up).

Combine SAR with other indicators

Parabolic SAR can be combined with many indicators. However, remember that in principle the SAR function is to identify trends and identify possible changes in price direction.

Given that SAR is a trend following indicator, SAR should be combined with indicators that can provide information about "STRENGTH trend". It is better not to combine SAR with other trend DIRECTIONS indicators (for example: MA, Bollinger Band, etc.), because it will only give the same output, which is the direction of the trend. Even though the purpose of combining indicators is to look for signal confirmation.

One indicator commonly combined with SAR is the Average Directional Index (ADX). This indicator can measure whether a trend is strong or weak. If the ADX reading shows that the trend is weak then prices tend to move sideways.

Then how to combine SAR with ADX?

Here it is "the secret". 🙂

If the ADX value is seen to be between 0-25, then the trend is considered weak and prices will usually move sideways (ranging). If ADX is read above 25, then the trend is considered to be quite strong.

If the ADX value is above 30, then the trend is considered even stronger and this is the ideal condition to be combined with SAR.

But be careful. If the ADX reading reaches 50 or more, there is a possibility that the price will stop rallying, there is even a possibility that it will change direction. So be careful if the ADX reading becomes too strong.

If you want to try using this system, then I recommend starting with the default settings for SAR and ADX. I also recommend to try it in a rather long period of time.

Also Read : Achieve Take Profit Targets with Moving Average Indicators