The parabolic SAR, also commonly referred to as the parabolic stop and reverse is one of the most widely used indicators among currency traders across the world. While there are many other tools available for predicting future movement of an asset, very few have lived up to be as efficient as the parabolic SAR. Here we will look into the best parabolic SAR settings as well as how you can incorporate it into your trading strategy, so you too can start making money on the markets.
Understanding and Using Parabolic SAR in your Trading
The parabolic stop and reverse system is used in calculating the direction of an asset’s momentum and the point in time where the momentum of the asset had an increase probability of reversal. In simple terms – indicating a change in trend. Like most other technical indicators, the parabolic SAR uses a series of colored dots – usually green and red, which is found either above or below the asset’s price on the chart. When the price is above the dots, you sell, and when the price is below the dots, you buy. Ultimately, when the dots change color, you reverse your trade position. Once the dots start moving closer to the candlesticks, indication that the trend is slowing down or reversing will become clear. Here, the use of additional technical indicators will give you a better idea as to whether you should stay in the trend and make a profit, or exit early.
The Best Parabolic SAR Settings
The acceleration factor, in general, is set to the initial value of 0.02. However, this factor increases by 0.02 each time a new EP (extreme point), is recorded, essentially escalating the rate to a point where the stop and reverse converges to the price. The maximum value for the acceleration factor is set to 0.20. In stock trading, most traders prefer an acceleration factor of 0.01, and in currency trading, traders prefer to set the acceleration factor to 0.02.
Short term traders – Preferred acceleration factor value of 0.06 and a maximum limiter value of 0.20.
Conservative traders – Preferred acceleration factor value of 0.02 and a maximum limiter value of 0.20, (default settings).
Although believed to be the best parabolic SAR settings, take some time to play around with the setting to see what works best for you. The parabolic stop and reverse, like most other technical indicators, will never be 100% accurate in prediction, but if combined with several other indicators, will surely enhance your trading success.