How To Use Parabolic SAR In Forex

The parabolic indicator generates stop points, from which existing positions should be closed and potential trend reversals anticipated. Since the parabolic indicator is designed to identify short-term momentum, forex traders can apply this indicator just as readily as traders of traditional stocks or commodities.

The technical strategy created by the parabolic indicator is referred to as a "stop and reverse," or SAR, method, so you often see it referred to as the parabolic SAR. The stop-and-reverse points of the parabolic indicator are below the price action when prices are rising, and above the price action when prices are falling, naturally creating a series of trailing stop losses that can be used to exit unprofitable positions.

For example, when the parabolic SAR point is below current prices, forex traders should go long. If the price drops to the stop point, close the long position and enter a short strategy for the opening of the next trading period. The opposite is true if the stop-and-reverse point trails above the price level.

The price action for currency pairs can sometimes be extremely volatile. In the wrong circumstances, the parabolic SAR may cause forex traders to exit positions prematurely or too frequently, limiting profit opportunities. There likely needs to be an adjustment period when trading any new pair. You can increase the sensitivity of the SAR by increasing the step multiplier in the acceleration factor, or AF. Conversely, you can decrease sensitivity by decreasing the step.

In markets that are too choppy and not trending, the parabolic SAR loses much of its efficacy. In these circumstances, it is often best to wait for a trend to emerge rather than overadjusting the sensitivity. Use an indicator such as the average directional index, or ADX, to identify trends first, and then use the...Read more


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