How to use the parabolic sar in forex trade?

The Parabolic SAR (Stop and Reverse) is a popular technical indicator used in forex trading. It is a trend-following indicator that helps traders identify potential entry and exit points in the market. In this article, we will explain how to use the Parabolic SAR in forex trade.

What is the Parabolic SAR?

The Parabolic SAR is a technical indicator developed by J. Welles Wilder Jr. It is used to identify potential trend reversals in the market. The Parabolic SAR consists of a series of dots that are plotted on the price chart. The dots are placed above or below the price depending on the direction of the trend.

How to calculate the Parabolic SAR?

The Parabolic SAR is calculated using the following formula:

SARn = SARn-1 + AF x (EP – SARn-1)

where:

SARn = the current period’s SAR value

SARn-1 = the previous period’s SAR value

AF = the acceleration factor

EP = the extreme point (the highest high or lowest low) of the current trend

The acceleration factor (AF) starts at 0.02 and increases by 0.02 each time a new extreme point is reached, up to a maximum of 0.20.

How to use the Parabolic SAR in forex trade?

The Parabolic SAR can be used in different ways in forex trade, such as:

1. Trend identification

The Parabolic SAR can help traders identify the direction of the trend in the market. When the dots are below the price, it indicates an uptrend. When the dots are above the price, it indicates a downtrend. Traders can use this information to enter trades in the direction of the trend.

2. Entry and exit points

The Parabolic SAR can also help traders identify potential entry and exit points in the market. When the dots are below the price, traders can look for buy signals. When the dots are above the price, traders can look for sell signals. Traders can use other technical indicators to confirm the signals and avoid false signals.

3. Stop loss placement

The Parabolic SAR can also be used to place stop loss orders. When traders enter a long trade, they can place a stop loss order below the Parabolic SAR dots. When traders enter a short trade, they can place a stop loss order above the Parabolic SAR dots. This can help traders limit their losses in case the market moves against them.

4. Trailing stop loss

The Parabolic SAR can also be used as a trailing stop loss. Traders can move their stop loss orders in the direction of the trend as the Parabolic SAR dots move. This can help traders lock in profits as the market moves in their favor.

Conclusion

The Parabolic SAR is a powerful technical indicator that can help traders identify potential entry and exit points in the market. It is easy to use and can be used in different ways in forex trade. However, traders should be aware that the Parabolic SAR can also generate false signals in choppy markets. Therefore, it is important to use other technical indicators to confirm the signals and avoid false signals.