Parabolic SAR indicator: essence and calculation formula
The Parabolic SAR indicator is often undeservedly bypassed, calling it an analogue of moving averages and giving preference to them. Nevertheless, this tool is included in MT4 and MT5 among the basic trend indicators and is relatively often used in the simplest strategies. Beginners like it for the unambiguous interpretation of signals. If you need to evaluate the nature of the signal at the moments of intersections with the price or with each other for a long time with moving averages, then everything is extremely clear: the location of the points in relation to the price has changed – a signal to open a deal.
Trading with the Parabolic SAR indicator
The author of the indicator is Wells Wilder, who also developed the more popular RSI. He first introduced the Parabolic SAR in 1978. It should be added that at about the same time, ATR was developed and stochastic modifications were already in full use. Therefore, it is not surprising that all these indicators, as the first of their kind, entered MT4. Although, given the specifics of dynamism, volumes, volatility and algorithmic nature of modern markets, these indicators seem hopelessly outdated.
Parabolic SAR is a trend indicator. It is displayed on the price chart as dots above or below the price. If the dots are above the price – the trend is downtrend, below – the upward trend. Sometimes a relatively clear horizontal indicator above or below the price is called a flat sign, and the lines themselves are called dynamic support and resistance levels.
The indicator has only two settings – maximum and step. They determine the location of the points relative to the candles (farther / closer) and the distance between the points themselves. It is recommended to keep the ratio 1:10.
Parabolic SAR differs from moving ones in that an acceleration coefficient is added to its formula. You can read more about what it is like in the book by its developer. But it only makes sense to do this if you are going to make changes to the code. This factor cannot be changed in the settings.
The SAR value rises if the price of the current candle is higher than the previous one. In this case, the coefficient will also grow, due to which the Parabolic SAR will begin to approach the price line. That is, the faster the indicator goes up, the faster the distance between it and the price decreases.
Signals are the nature of the change in the distance between the indicator points and the price, as well as the change in the position of the points. The Parabolic SAR problem is lag. To some extent, the indicator can be called a switchman, which is why professionals avoid it. The market is situational. For example, moving averages can come close to the price and not cross it, signaling a weak and false signal. Parabolic SAR changes its position abruptly, therefore it is impossible to track how strong the signal is.
Output… Parabolic SAR can be used as the main indicator. It gives quite interesting signals that should be filtered with the same moving or oscillators without ignoring the patterns. An example of combining an indicator with candlestick analysis is discussed in this review. If you still have questions, ask them in the comments!