As its name suggests, the parabolic SAR indicator helps traders figure out when to exit a deal and change direction. It also helps them spot trends. Another trading measure made by famous technical expert and commodities trader J. Welles Wilder is the Relative Strength Index (RSI). A Parabolic SAR indicator has a line of dots above or below an object's price. Above an asset's price indicates a downward tendency, whereas below it indicates an upward one.

Formula Of Parabolic SAR

A simple way to calculate the SAR is to increase the AF by the difference between the present SAR and the high point of the previous time. Then, the new SAR is found by adding this value to the old SAR number.

SARt = SARt-1 + AF x (EP SARt-1)

Where:

• SARt: Current period SAR
• SARt-1: Previous period SAR
• EP: Highest high (uptrend) or lowest low (downtrend)
• AF: 0 to 0.2, rises by 0.02 with each new extreme point.

With this parabolic SAR formula, traders can quickly figure out how much the SAR will change between periods and make the necessary changes to their trading plan. Such as, suppose the previous high was 100 dollars and the current SAR was 90 dollars, the AF would be = $2.0 x ($100 - $90), which is $2. A new SAR of $92 would be made because of this. Also, by planning their deals and knowing how much the SAR will change each time, traders may be able to get an edge.

4 Steps of Parabolic SAR

Traders will look at an asset's price direction and use the parabolic SAR strategy to find possible signs to buy or sell. The SAR signal is a dot above or below the price. It is also a sign that things are heading well and that buyers should consider purchasing when the SAR is less than the price of the commodity. However, a downward trend and an opportunity to sell exist if the SAR exceeds the asset's price. Here are the four steps of parabolic SAR, which include the following:

• Extreme Point
• Acceleration Factor
• Periods/Max
• Indicator Settings

Extreme Point

The extreme point (EP) is the highest or lowest price that occurred before the current time frame. "Acceleration factor" (AF) is another idea that the parabolic SAR strategy uses to figure out the parabolic SAR indicators speed as it moves away from the extreme point. The AF is found by dividing the disparity of two SAR points that are next to each other by the S step before them.

Moreover, if AF is more than that amount, the highest AF number should be set. The parabolic SAR EP is the most elevated or most subordinate point of a trend before it changes direction. Traders may also use this to place stop-loss orders along trend lines or to figure out what to buy and sell based on current trends. For example, if the current price goes above the SAR high point, a trader can look for a positive turn.

In the same way, a negative reverse is seen if the present price falls below the SAR high point. This may help traders figure out when it might be best to buy or sell along the trend. Furthermore, you can also put stop-loss orders at or near the SAR extreme point to protect traders from being caught off guard by sudden price changes.

Acceleration Factor

The acceleration factor (AF) moves away from the EP at a certain speed, which is called the acceleration factor (AF). The Acceleration factor (AF) is another important part of the signal. The AF specifies how fast the SAR EP move when prices change.

Moreover, when there is more AF, the SAR extreme points move faster. When there is less AF, the SAR extreme points move more slowly. This might also be useful for traders who want to play the long game and like slower changes at extreme points or for traders who wish to make money on short-term price changes.

Maximum Acceleration

The maximum speed that the AF can reach is called the maximum acceleration (MA). Traders can change the Parabolic SAR settings to use a number of different strategies. When you trade momentum, you should use shorter time frames, like 1- or 5-minute charts.

Also, when you trade swings, you should use longer time frames, like 4-hour or daily charts. By changing the calculations, you can make the indicator work better with some trade methods and market conditions.

Indicator Settings

The lowest span of two SAR points to use depends on how you trade and how long you want to trade for. There are only two critical choices:

• Step
• Maximum

The size of the acceleration factor is known as the step. The step normally has a value of 0.02 in MT4 and MT5. The acceleration factor starts at this number and goes up by the step size with each high or low, up to the amount set by the Maximum setting. Also, by default, the highest number in both MT4 and MT5 is 0.20.

In general, the less acceleration factor there is, the less closely it will follow the price. However, it will get closer to the cost as the acceleration factor increases. So, the chance of a reverse goes up as the acceleration factor goes up.

Any number between 0.018 and 0.021 would work, but it was found that the usual number of 0.02 worked best. As a precaution, it is suggested that the maximum number not be raised above 0.22. The best factors for a dealer will, of course, depend on their parabolic SAR strategy and tastes. While it is usually best to start with the basic options, you can find the best parabolic SAR choices for you by trying out different numbers.