Parabolic SAR forex trading strategy was developed by J Welles Wilder in 1976. It is one of the most popular trend indicators in the forex technical analysis. While most of indicators show us the beginning of a new trend, parabolic SAR points to the end of a trend.
Parabolic SAR stands for Parabolic Stop and Reverse and parabolic comes from the word parabola referring to the mathematical shape of the parabola which is like a cone with a rounded tip. The calculations are too complex to do easily by hand. However, it is not required to understand the calculations behind that indicator, since you can see the result clearly on your charts .
The indicator appears on charts as a successive set of dots higher than or lower than the actual price. Usually this indicator is applied with the candlestick chart, so you will see the dots below the candles during an upward trend and above the candles during a downward trend.
We mentioned that there were several hard technical aspects of SAR algorithm which can be found elsewhere, however, the practical use of this indicator is very simple. The positioning of the "dots" produced by SAR (see the Figure below ) is used by forex traders to generate transaction signals depending on where the dot is placed relative to the price. A dot placed below the price signals traders to expect the momentum to remain in the upward direction. Conversely, a dot placed above the price indicates that that the momentum is likely to remain downward.
Note that SAR is not a very good tool for scalpers. The short term fluctuations of a choppy market will produce many false SAR signals and therefore will be useless. However, if you are patient and go with the long trends lasting several hours or days and structure your forex trading system is around this type of trading, the Parabolic SAR is a valuable tool to control your trades using forex charts.
Finally, although parabolic SAR is considered by many forex traders as one of the best indicators it could be useless in the so-called “flat market”. In that case SAR may generate many false signals.