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Usage of Parabolic SAR in Trading Strategies on Forex Markets

Posted Feb 20 2013 6:31am

The following technical analysis’s indicator which should draw attention to the process of learning Forex trading and forex market  in general is Parabolic SAR (parabolic stop and reversal). This indicator was developed by Welles Wilder (J. Welles Wilder Jr.) who was the famous trader who made a great contribution to the research and development of the technical analysis of financial Forex markets. Applying this indicator properly you can significantly reduce the number of trading errors, and, therefore, and increase profits.

 

About Parabolic SAR Role on Forex markets

Parabolic SAR indicator gets its name from the form that it takes on a curve on the charts used at Forex markets. The parabolic shape of the indicator is explained by the mathematical formula for its calculation, which will be discussed below. An important condition for the application of this indicator when analyzing Forex markets is the presence roar clearly expressed trend - in this case, the indicator may give a good signal weakening trend or its reversal, it means a good signal for closing a position in one direction and the possible opening of another. If the price fluctuation occurs in the horizontal range, the indicator may give many false signals. Therefore, before using this indicator and rely on its signals, you should confirm the presence in the market prevailing trend of the analyzed currency pair. You can use these technical analysis tools, we have already discussed how the levels and support and resistance lines, shapes, trend reversal, trend continuation patterns, moving averages, Bollinger Bands, Convergence Divergence Moving Average, etc.

 

As can be seen from the figure, the indicator is a curve formed by points. Each point corresponds to its trading period depending on the scale of the price chart, but as a rule, are used daily charts. If the curve of the indicator is under the price chart, it signals an uptrend. If the curve is an indicator of the price indicator, it signals a downtrend. In that moment when the curve crosses the indicator price chart, the strength of the trend decreases and there is a greater likelihood of its reversal. Read more articles from this author:How to Choose a Forex Malaysia Broker?. Approximation of the curve of the parabolic SAR system to the price chart indicates weakening trend. The distance between adjacent points indicator also symbolize the strength of the trend - the greater the distance, the stronger the trend. But remember that the trend could turn around and at great speed!

 

Such behavior of the curve of the parabolic SAR indicator system is defined quite clearly the algorithm of its construction. This algorithm is based on two concepts: an extreme point and the acceleration factor.

 

The upward trend of the extremum point is the highest price recorded in the trend. On a downtrend this point is the minimum fixed price. As soon as the indicator of the parabolic SAR system signals a trend reversal, the algorithm for calculating the extremum is reversed.

When there is such a signal, the acceleration factor is reset to its initial value for which in practice often used value of 0.02, ie 2%. When the closing price of the current trading period, on an uptrend exceeded last committed point extremum, this ratio increased by 2%, and the value of extremum updated. The same increase in acceleration factor and update the extremum occurs if the closing price of the current trading period is less than the extreme point on a downtrend. The indicator is calculated ahead, ie of the current day are used in calculating the indicator values of tomorrow.

 

Mathematical formula to calculate the indicator of the parabolic SAR system is recursive and is the following:

SAR (n +1) = SAR (n) + AF * (EP - SAR (n)),

 

where SAR (n +1) - the value indicator of tomorrow, SAR (n) - the indicator value of the current day, AF - the acceleration factor and the EP - the latter fixed point of extreme. In addition, And also add him to friends at forex online in the process of calculating the indicator are used few additional conditions:

 

•           if the indicator’s value of tomorrow SAR (n +1) lies within or outside the price range of today (n) or yesterday (n-1) of the trading day, then its value is set on a lower limit of this range. For example, if in an uptrend, the indicator’s value is greater than the minimum price fixed for the past two days, including today, the indicator takes the value of the fixed minimum prices, for the downward trend of the converse is true;

 

•           if the indicator value tomorrow SAR (n +1) lies within or outside the price range tomorrow, is a signal of a trend reversal, and an algorithm for calculating the indicator should switch the "phase".

 

As soon as there is a change of trend, ie switching "phase" of the algorithm, the indicator’s value on Forex markets of the parabolic SAR system for the new trend is set to the last committed point of extreme EP of the old trend. Itself an extreme point in this case is set to point the maxim, if a new trend - the rising and the minimum point, if the new trend - downward. Acceleration factor AF is reset to its initial value of 2%.

Indicator of the parabolic SAR system can be used as a stop-loss signal in the bidding process on Forex markets. The value of technical indicator is always lagging behind prices, so at the time of entry can be safely set stop-loss in the current value of the indicator.

But first make sure that such an approach does not violate your money management strategy in trading on Forex markets. at www.liteforex.com

 

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