Welcome to Lesson 8 of the Forex Indicators series. In this part, we focus on the parabolic sar, a trend-following indicator widely used in forex trading.
This indicator is represented by a series of dots positioned either above or below the price on a chart. These dots serve as a visual guide to the market’s trend direction:
Although some traders use the parabolic sar strategy for trade entries, the most effective use is for trailing stops to protect profits during a trend.
For example, during an uptrend, the parabolic sar places dots below the price. If you enter a trade at this point, the SAR dots act as a dynamic stop-loss level. As the price moves up, you trail your stop just below these dots.
When this indicator flips and places dots above the price, it signals a possible retracement or trend reversal. Here’s how to interpret this:
- If SAR places only two dots above before moving back below, this suggests a minor pullback, and you should consider keeping your trade open.
- If SAR forms three or more dots above the price, it indicates a deeper retracement or trend reversal. This is a good time to take profits or close your position.
Settings and Market Conditions
The parabolic sar works best in trending markets and tends to produce false signals during range-bound conditions. Adjusting the parabolic sar settings can help optimize its responsiveness, but its core value lies in managing trades during clear trends.
Summary
The parabolic sar indicator is a powerful tool to trail stops and manage risk in trending markets. Knowing how to use it effectively allows you to lock in profits and exit trades before major reversals. Use the strategy alongside other trend indicators to enhance your trading decisions. Experience professional trading tools with PROP365, your reliable partner in forex trading success.
