Parabolic SAR indicator was created by the famous trader Welles Wilder. Main objective indicator will identify and stop the spread of price movement.
Indicator used by many retail market if the trend movement, to predict the most favorable points of entry and exit from the market. The trading strategy for Parabolic SAR is very simple - if the price chart above indicator, is to open short positions, and if the price is below the indicator, it should be open long positions.
Description of indicator
When the indicator trader must know the concepts that follow. In the future, they will help to explain the principle of the indicator.
Point acceleration - the highest price that was reached during the short position and the lowest price that was reached during the long position.
The point of reference - the highest price, which was at the time of the short position and the lowest price at the time of long positions. Also, it is a point of acceleration after closing the candle.
On the first candle in the new movement indicator is equal to the reference point, which is calculated from the previous candle. Indicator values will rise in cases, when the price of the current candle for more compared to the previous price of an upward movement of the market and vice versa.
And disadvantages of the indicator
Turn indicator signals a trend reversal or a transition to flat. Focusing on the need to close the current reversal of the transaction or to enter into new ones, according to the indicator. For example, let's look at the whole situation. You signed an order to buy, after a while (your prediction was correct), the indicator changed direction in the opposite direction. At this point, you need to close the current order, as this signal the end of a trend. Your next steps - you have to wait some time to determine - trend began to move in the opposite direction or moving flat. If the trend movement began again - into the market, but do not forget a stop order, in case the indicator will give a false alarm.
Disadvantages.
Depending on the instrument and the time period trend movement can vary radically. Therefore, this indicator is not recommended as a universal tool for predicting a large number of currency pairs.
Parabolic SAR trend indicator, so it works well with the trend movement, but it gives many false signals when the market is in a flat market.
Postulate of the Forex market - a trend change direction when the stop level. But every experienced trader knows that the strong movement, the trend can be up to several times the level of the stop. At this time, the indicator gives a false signal of trend reversal, while the trend continues.
Results of
If you are thinking that the trend indicator is useless, it is false thinking. The indicator does not give clear signals to buy or sell, but that's no reason to scratch it off their arsenal. Parabolic SAR, as mentioned above, is a trend indicator. If you've read the previous articles on the indicators, you probably noticed that most of the indicators (especially oscillators) should be based on the direction of the trend. For example, the ADX indicator is very popular among traders, but it is negative - it does not indicate the direction of the trend, but only its effect. And using both indicators ADX and Parabolic SAR you will have the data and the strength of the trend and its direction.