How to use Parabolic SAR Indicator to Trade Stock & Binary Options
The Parabolic SAR indicator (or PSAR) is designed to calculate the point in time when there emerges a better than average probability of a trend switching directions.
Developed by Welles Wilder, a famous technical trader who also created the RSI indicator, the Parabolic SAR is easy to understand and is used by many traders to predict when a trend will reverse.
Visual Representation of the Parabolic SAR
On a chart, the Parabolic SAR indicator is displayed as a series of dots positioned either above or below the asset's price. A dot below the price indicates a bullish trend while a dot above the price indicates bearishness.
Stops and Reversals
A trading signal is generated whenever the series of dots reverse positions. A buy signal is generated when the dots shift from above the price to below the price. A sell signal is generated when the dots move from below the price to above the price. Traders typically wait for two or more dots to crossover before confirming the signals.
PSAR Parameters
The parabolic SAR indicator only has two parameters. They are the Acceleration Factor or AF and the maximum AF.
The Acceleration Factor affects how sensitive the PSAR indicator is to the underlying price fluctuations. The higher the AF, the more sensitive the indicator which translates into higher frequency of buy or sell signals being generated while simultaneously also reduces the strength of these signals.
Typically, the AF is defaulted to 0.01 for stock trading and 0.02 for currency trading. Maximum AF is usually set at 0.20.