How to Trade with Parabolic SAR in the Most Effective Way
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One of the most popular technical indicators among binary option traders is Parabolic SAR. But apart from the trend, Parabolic SAR can also signal the reversal. In general, Parabolic SAR is very interesting and useful tool for trading.
Parabolic SAR indicator was developed by Welles Wilder back inbut despite its age, the indicator has not lost its relevance today. Parabolic stop and reverse indicator useful binary option strategy was an outstanding personality who developed several other indicators as well, RSI and DMI being a couple of them.
The chart below demonstrates the indicator in a form of consecutive dots that are drawn below or above the price:. When the dots are above the price, this indicates a downward trend, and when they are below — an upward trend. Like the majority of technical indicators, Parabolic SAR is calculated based on quotes history.
It follows price changes and if dynamic is shrinking, dots are drawn closer. Accordingly, the further the dots are from the price, the stronger is the trend. When a price touches a dot, then subsequent dots are drawn on the other side signaling trend reversal:.
This is a very simple, yet not very popular method. In order to trade at reversals, the contract should be opened every time when dots start to appear on the other side, as is shown on the screenshot below:.
Worth noting that many traders criticize this method claiming that it gives too many false signals which parabolic stop and reverse indicator useful binary option strategy more loss-making options than profitable ones. Parabolic stop and reverse indicator useful binary option strategy statement is quite fair as the price is highly volatile on the screenshot above.
As is shown, there are a lot of false signals and earning something without supportive tools is fairly difficult in such conditions. The second method is more precise, but requires the use of ADX indicator to filter the signals.
The use of ADX indicator is recommended by the Parabolic developer himself. If the line rose to the value above 25, it indicates that trend is strengthening. And finally, when the value is above 30 and Parabolic SAR gives a signal, then corresponding option should be bought.
There were three false signals from Parabolic, but since ADX line was below the value of 25, all of them were ignored. The main parameter is the Lag, which is set to 0. If the lag is smaller, then Parabolic will have slower reaction to price fluctuations, but its signals will be more accurate.
And if the lag is increased, there will be more signals, but their quality will worsen. In order to find the most appropriate settings for a certain asset, settings should be tested first. It is recommended to use standard parameters. Each signal and its quality should be examined during a given period of time. Then settings should be changed and new signals should be marked on the same time period.
It is important to underline that the longer period is used for testing, the more reliable the settings are. The main purpose of Parabolic SAR indicator is determination of current state of the market.
But momentums to enter the market that it shows are far from the best quality, at least without use of supportive indicators. Nevertheless, once the parabolic stop and reverse indicator useful binary option strategy setting for a given asset is found, Parabolic becomes a powerful tool.
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