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Sunday, 7 July 2019

How to use Parabolic SAR?

At the beginning of its creation, the Parabolic SAR indicator was created as a tool to find out when a trend will reversal or turn around. But in its current development, the Parabolic SAR indicator has been used in various ways, namely:



1. Trend Spotting

As a trend indicator, Parabolic SAR is very good for detecting market bias. As mentioned a little above, the SAR point will appear at the bottom or top of the candle.

When the market tends to be upward biased (Uptrend), the SAR point will appear at the bottom of the candle. The appearance of this point starts when the price has succeeded in making a new high point in one period. Look at the picture below. The price managed to penetrate its highest point in the candle with purple circles. At the time of this breakout, a new SAR point is formed below the candle which indicates a bias in the trend has changed.

This also applies to markets with a downtrend; SAR points will appear at the top of the candle. The appearance of this point starts when the price has succeeded in making a new low in one period. Look at the picture below. The price broke the lowest point on the candle with a purple circle. At this break, a new SAR point is formed above the candle.

In market conditions that are ranging, these points will also fluctuate and move from one side to the other. This will sometimes complicate SAR points for analysis. In general, indicators based on Trend Following indeed become helpless when the market is in conditions ranging.


2. As Determinants of Entry

Aside from being a Trend Spotting, the Parabolic SAR indicator can also be used as a benchmark for determining Entry positions. This entry is of course a little more complicated than just seeing where the location of the SAR point appears, given the number of false signals that can appear when the market is ranging.

In a detailed explanation in the book New Concept In Technical Trading Systems, Wilder explained the importance of knowing the big trends of the market before making an Entry. This big trend can be detected by looking at SAR points at a higher time frame, or by using other indicators such as the Moving Average.

If you already know the big trend, Wilder suggests just opening the position in accordance with the direction of the big trend. For example if a large trend is detected going up, then it is enough to look for opportunities to rise only. In opening the position, Wilder also emphasized to wait until the appearance of 3 SAR points before entering the market. Look at the picture below for a better explanation.

Also Read :Indicators that are often used by traders

3. As a benchmark for Exit and Trailing Stop

Another function of using the Parabolic SAR indicator is the Exit or Trailing Stop manual for positions that are already open. Stop Loss when opening a position with the Parabolic SAR indicator is usually placed in the area around the first SAR point that appears after the position is open. The advantage of using this method is that the Stop Loss distance to be used tends not to be too far from the Open position, so the opportunity to secure profits immediately becomes better.

Aside from being a Stop Loss place, the Parabolic SAR indicator can also be useful as a reference for Trailing Stop. There are times when a price will be biased to one side continuously for a long time. If this happens of course, you do not want to close the position earlier with less than the maximum profit. Therefore, most trend traders often use Trailing Stop as Exit one position in the market.

The Parabolic SAR indicator is very suitable for this. With a varied step, Parabolic SAR is able to quickly detect when a trend is weakening or when it is strengthening. In addition, setting the Trailing Stop distance with the Parabolic SAR indicator is better and directed rather than manually setting it.

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