Parabolic SAR Oscillator

The Parabolic SAR Oscillator, also known as the “Parabolic Stop and Reverse”   was introduced by J. Welles Wilder in his 1978 book “New Concepts in Technical Trading Systems”. The book also featured other classic indicators such as the Relative Strength Index, Average True Range, and Directional Movement Index. Today, the Parabolic SAR remains a widely used and important tool in technical analysis for forex and stock markets.

What is the Parabolic SAR Oscillator?

The Parabolic SAR Oscillator is a unique technical indicator that helps traders determine the direction of an asset’s trend and provides signals for potential trades. It is commonly used in forex trading but can also be applied to other financial markets.

Parabolic SAR Oscillator - MT4
Parabolic SAR Oscillator – MT4

Key Features of the Parabolic SAR Oscillator

  • The Parabolic SAR Oscillator is a trend-following indicator that uses a series of dots to indicate the direction of the trend.
  • It can provide traders with entry and exit signals in a clear and concise manner.
  • The indicator is easy to interpret and can be used in conjunction with other technical indicators for a more robust trading strategy.

Parabolic SAR Oscillator Overview

The Parabolic SAR indicator is a technical analysis tool used by traders to track the price movement of an asset. Unlike a moving average (MA), which calculates the average price over a selected number of periods and plots it on the chart, the PSAR looks at the asset’s extreme highs and lows and uses an acceleration factor to determine its position.

The PSAR generates a new signal each time it moves to the opposite side of the price, providing traders with a constant presence in the market. However, the PSAR is always on, generating signals even when there is no significant trend present. To avoid poor-quality signals, traders should use the PSAR in conjunction with other indicators such as the average directional index (ADX), a moving average, or a trendline to confirm its signals.

In trending markets, the PSAR can be effective in capturing significant gains, but in range-bound markets, the indicator may result in multiple low-profit or losing trades. Additionally, a reversal signal on the PSAR doesn’t necessarily mean the price is reversing, as a reversal is generated when the SAR catches up to the price due to its acceleration factor.

Parabolic SAR Oscillator Strategy

Buy Signal

  • The Parabolic SAR Oscillator generates a buy signal when it shifts from above to below the asset price, suggesting a potential trend reversal. This prompts traders to open a long position, expecting the asset’s value to rise further.
Parabolic SAR Oscillator Buy Signal
Parabolic SAR Oscillator Buy Signal

Sell Signal

  • The Parabolic SAR Oscillator generates a sell signal when its dots change position from below to above the asset price, indicating a potential trend reversal. At this point, traders may choose to go short, expecting the asset’s price to keep declining.
Parabolic SAR Oscillator Sell Signal
Parabolic SAR Oscillator Sell Signal

Parabolic SAR Oscillator Pros & Cons

Pros

  • Provides clear entry and exit signals for potential trades.
  • Easy to interpret and use.
  • Can be used in conjunction with other technical indicators for a more robust trading strategy.

Cons

  • Can generate false signals, especially in choppy market conditions.
  • Does not provide any information on market volatility.
  • Can be subject to lag, leading to missed trade opportunities.

Conclusion

The Parabolic SAR Oscillator is a useful tool for forex traders who are looking for a simple and straightforward way to determine the direction of an asset’s trend and generate entry and exit signals. While it does have its limitations, it can be a valuable addition to a trader’s arsenal of technical indicators. As with any technical indicator, it is important to use it in conjunction with other forms of analysis and to always have a well-defined trading plan.

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