The Parabolic SAR is far and away the most popular indicator that doesn’t use lines on the chart. It’s used by range traders and trend traders alike, although it’s widely used by trend traders. The indicator provides long term opportunities by spotting entry and exit signals.
The Parabolic SAR starts with a dot underneath the price. The longer that the dot remains underneath the price, the dots move exponentially races to catch up with the individual bar lows formed in the market.
If the Parabolic SAR started only 5 bars ago, the rate of change between the dots is very small. But as you get 20-30 bars into an opportunity, as you see here, the space between each successive dot increases rapidly. It’s like the PSAR is saying this trend has got to end soon. It’s waiting for the final bit of confirmation to flip direction.
The dots on this chart are either above the price or below the price. When they start below the price, the moment that they flip is when this low touches the dot formed on the last bar. At the precise moment when the bar’s low touches the PSAR value on the last bar, the dot flips.
The dot is now above the price. That is a valid sell signal. The sell signals work in the opposite way to the long signals. You’re waiting for a bar high to touch the dot and create a new buy signal.
The indicator gives you an always in the market reading, either long or short. All of the signals alternate purely back and forth between buy and sell signals.
The way to use this in a trending strategy is as basic as the indicator. Buy when the dot flips below the price. Sell when the dot flips above the price.
The best Parabolic SAR strategy that I’ve seen historically is the GBPJPY H4 chart. That currency pair is prone enough to trends to generate signals with substantial volatility. But, the four hour time frame is short enough that it’s able to exit trades, both good ones and bad ones, in relatively short order.
You do give up substantial ranges on profitable trend trades by waiting for the dots to catch up. There’s not much that can be done about that except by playing with the PSAR acceleration values. You can do that by left clicking on the chart and choosing indicators, then Parabolic SAR. The inputs window shows the step and acceleration, which you can play with to suit your trading style.
Click the link below the video if you’d like to try the Parabolic SAR and need a free demo account for MetaTrader. That will take you straight to site where you can get one immediately.