What is the Parabolic SAR

Originally developed by Welles Wilder, the Parabolic SAR is a technical analysis indicator that identifies the momentum of an asset’s price—in other words, the direction of the leading price trend.

Let’s look at how we can trade Binary Options using the Parabolic SAR. Suppose a trader chooses to trade EURUSD on a short-term time frame. Below is a 1-minute EURUSD chart.

Chart: Parabolic SAR on EURUSD

 

Trading Binary Options using the Parabolic SAR

There are some important steps for any trader who decides to trade using the Parabolic SAR:

1. The trader switches their view to the 1-minute chart.

2. The Parabolic SAR indicator is added.

3. The original Parabolic SAR settings of 0.02 and 0.20 are maintained.

4. The trigger occurs when the asset price crosses the Parabolic SAR.

5. If the next asset price moves in the same direction as the cross, an entry signal is generated. This means the trader opens a position in that direction.

• If the next asset price moves in the opposite direction of the cross, there is no signal.

 

 

The Role of the Dots in Parabolic SAR

The positioning of the dots in the Parabolic SAR can generate visual trading signals.

◘ When the Parabolic SAR dots appear below the current asset price, it signals an ongoing bullish trend.

◘ When the Parabolic SAR dots appear above the current asset price, it signals an ongoing bearish trend.

As the price of an asset rises, the Parabolic SAR dots will rise as well—starting slowly, then accelerating with the trend. The Parabolic SAR is more effective when the asset price follows a clear trend. If the asset price moves sideways during the day, the Parabolic SAR may generate a series of false signals.

 

Timing is Everything when You Trade Using Indicators

Almost every technical analysis model can provide value for traders, but the key variable is always correct timing. You must know which indicator to use—and most importantly, when to use it.

 

The Use of Parabolic SAR

The Parabolic SAR is used by many traders as a tool for determining optimal stop-loss levels. It is also popular among traders developing their own trading strategies. To minimize false signals, traders often combine the Parabolic SAR with another indicator—for example, by using it alongside a moving average or the MACD.