In this article, we are going to focus on a popular indicator, which you can use in technical analysis and implemented it in your forex trading strategy. This indicator is the Parabolic Sar (Stop and Reversal) developed by Welles Wilder creator of RSI and DMI.
Most indicators have been created to identify if a trend is in place (the trend is your friend as they say) but they are usually too slow, as a result, if you rely only on a trend indicator you will probably lose most of a trend’s movement. For that reason you should use others types of indicators together with trend indicators. If you do not do that, you will experience many times a winning trade turning into a losing one.
One of these indicators is the Parabolic SAR. The calculation of Parabolic SAR is a little complicated but fortunately, you do not have to understand it, since all good trading platforms and charting packages will calculate it automatically for you. It appears as a series of dots above or below the prices, which can signal a possible reversal in the trend. Here is an example:
As you can see in the graph, dots are typically below the candles for the duration of an uptrend and above them during a downtrend. Therefor when price cross above the dots you have a signal that a downtrend has ended, which means that, is time to exit the trade. On the contrary, when prices cross below the dots, you have a signal that the uptrend has finished.
The best way to use Parabolic Sar is to use the dots as trailing stops. In that way when you place a trade you should use Parabolic Sar as a stop loss or stop profit and close your position when you get a signal to exit.
Parabolic SAR works best when there is an actual trend but when the market moves in a choppy way and there are many whipsaws and fluctuations it is not reliable. Having that in mind it is advisable not to use it in those conditions, but wait until a trend is established.
Parabolic Sar is a useful indicator and if you use it in the right way, it will boost your profits in forex trading. Nevertheless, you should always use it in combination with a trend indicator if you want to get the most of it.