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What is parabolic sar in forex?

The Parabolic SAR (Stop and Reverse) is a technical analysis indicator that is widely used in the financial markets, including the forex market. It was developed by J. Welles Wilder, Jr. and introduced in his book, “New Concepts in Technical Trading Systems.” The Parabolic SAR is a trend-following indicator, which means it is designed to identify the direction of the trend and provide signals for entry and exit points.

The Parabolic SAR indicator is based on the concept of the “stop and reverse” system, which is used to identify when a trend is changing direction. It uses a series of dots that are plotted on a chart to indicate potential price reversals. The dots are plotted below the price when the trend is bullish and above the price when the trend is bearish.

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The Parabolic SAR calculation is based on two parameters: the acceleration factor (AF) and the extreme point (EP). The acceleration factor is a multiplier that is used to increase the speed of the indicator as the trend continues. The extreme point is the highest or lowest price point of the trend, depending on whether the trend is bullish or bearish.

To calculate the Parabolic SAR, you first need to determine the initial trend direction. This can be done by looking at the price chart and identifying the direction of the trend. Once you have determined the trend direction, you can calculate the initial SAR value by using the following formula:

Initial SAR = EP – (AF * (EP – Low))

Where EP is the highest price point of the trend, Low is the lowest price point of the trend, and AF is the acceleration factor. The initial SAR value is plotted on the chart as a dot.

Once the initial SAR value is plotted, the indicator continues to calculate new SAR values for each subsequent period. The SAR value is calculated using the following formula:

SAR = SAR(previous) + AF * (EP(previous) – SAR(previous))

Where SAR(previous) is the SAR value from the previous period, EP(previous) is the highest or lowest price point of the previous period, and AF is the acceleration factor. The new SAR value is plotted on the chart as a dot.

As the trend continues, the AF value is increased, which allows the SAR dots to catch up to the price faster. This makes the indicator more sensitive to changes in price momentum and helps to identify potential trend reversals.

The Parabolic SAR indicator is most effective when used in conjunction with other technical analysis tools, such as moving averages, oscillators, and trend lines. It can be used to identify potential entry and exit points for trades, as well as to set stop-loss orders and trailing stops.

In conclusion, the Parabolic SAR is a popular and effective technical analysis indicator that is used by traders in the forex market and other financial markets. It is a trend-following indicator that is designed to identify the direction of the trend and provide signals for entry and exit points. The Parabolic SAR is a valuable tool for traders who are looking to improve their trading strategies and increase their profitability.

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