What is the SAR Parabolic Indicator ?
What we call the ″SAR Parabolic Indicator″ is actually a tool that enables the efficient placing of orders within a precise trend. It is a form of algorithm created by the mathematician Willes Wilder that offers the possibility of placing mobile stop orders.
The term ″SAR″, meaning Stop and Reversal echoes its actual usage in mobile stops.
It works through a unidirectional indicator which means that this indicator acts according to the time and rates observed. Its direction can therefore stabilise when the rate is consolidating around a value and cannot reverse without first achieving that same value of the rate concerned.
How to read an SAR Parabolic Indicator
The SAR parabolic indicator is represented as a graph in the form of a parabolic curve that changes in accordance with the rate. It is generally advisable to close a position and choose an inverse position when this indicator meets the rate of the currency pair that is being followed.
The SAR parabolic indicator shows the best entry and exit points in a market.
Most of the time the SAR parabolic indicator is shown in the form of a bar graph so that the entry points are more easily visible.
For long positions, you will see the SAR points above the rate of the value whereas with a short position, the SAR points will be beneath the price of the value concerned.
In the form of a particularly firm trend we will see the evolution of the SAR points in accordance with the price with a gradual tightening as the trend is confirmed. For this, the parabolic indicator uses an acceleration factor that progresses up to a limit corresponding with the extreme point in the growth of a trend.
How to use the SAR parabolic indicator
We find three different uses for the SAR parabolic indicator. The first is for determining the best moment to close a current position to enter into a reverse position, found when the SAR points cross the rate of the asset. This indicator therefore enables the anticipation of the reversal of a trend so you can avoid unnecessary losses. This could therefore be an important sale signal enabling you to gain a profit with a reduction in the risk of losses.
However the SAR parabolic indicator can be used in reverse, as a means of detecting buy signals. Again by studying the graph and, at the moment of impact between the technical indicator and the rate of the value line, that is the movement of the trend that will give you most information on the direction to follow. It is therefore necessary to use another trend indicator together with this one.
Finally, the most common usage for the SAR parabolic indicator is to use the parabolic points position to fix the limits for loss by placing stop loss orders at these points.
The SAR parabolic indicator can therefore be of great use to master the risks when trading in a precise trend. It is however not of great use outside a clear tendency. It can in fact even give false signals.
This is why this indicator is reserved for experienced traders.
Parabolic SAR’s limitations:
As mentioned above, Parabolic SAR only indicates how to place your mobile Stop Orders. Therefore, it stands to reason that in order to take advantage of it, you should enter the market that’s as far away as possible from this indicator in order to make the most out of strong fluctuations.
Even if Parabolic SAR doesn’t provide any indication concerning the market’s best points of entry, it’s easy to visualize the gap between the current course of the market and that of the indicator. If the disparity is enough to make you expect interesting profits, having taken into account brokerage costs or other commissions inherent to your transaction, you may use it with confidence.
However, as with any other technical indicators, this indicator shouldn’t be used on its own and must ideally correlate with other buy and sell signals as well as with a trend indicator such as RSI.