Every profitable retail trader needs to master at least 3 Technical Indicators to give their technical analysis some advantage, and there are loads of them to choose from on the MetaTrader-4 platform (MT4).
Traders, as a rule, must find logical levels of entry into any currency pair market. However, when and where to exit a position is often a difficult decision for many.
Let's consider a default MT4 indicator today that combines a parabolic system of price and time.
What Is The Parabolic SAR - (PSAR)?
The Parabolic SAR is referred to as a trend indicator that sets a moving price stop for long or short positions; hence, it is best suited for placing stop orders rather than establishing the direction of movement or trend.
This tool can be found under the "Trend" section of your Navigator panel on your MT4.
It forms a line very similar to a parabola (hence, the very name of the indicator), which appears on the price chart as dots according to their appearance, giving conclusions about the state of the market and the prospects for its trend development.
So, if the price (candlesticks) crosses the Parabolic SAR, the indicator reverses, and its next values are located on the other side of the price (candlesticks).
In this case, the "flip" of the indicator will serve as a reference point for the maximum or minimum price for the previous trend period.
The reversal of the indicator is a signal either about the completion of the current trend or its reversal.
Wilder (the inventor of the Parabolic Sar) advises first to determine the trend and then trade with a Parabolic SAR in the direction of the trend.
If it is up, then you should buy when the PSAR indicator moves below the price.
If the trend is down, you should sell when the PSAR indicator moves above the price.
➡ Long positions should be closed when the price falls below the technical indicator line.
➡ Short positions should be closed when the price rises above the Parabolic SAR line.
It's necessary to track the direction of the movement of the PSAR and keep open positions in the market only in the direction of this movement. This indicator is often used as a trailing stop line.
PSAR Application In Trading: How To Determine The Trend
The PSAR is very easy to use to determine a short-term trend for Intraday-Trading.
If the price candlesticks are located above the indicator curve, this indicates an uptrend.
If the price candlesticks are under the curve of the indicator, it is a downtrend.
Suppose the price chart has moved significantly away from the indicator line. In that case, most likely, their convergence will soon occur, and the trend will change to the opposite, or the market will enter a consolidation stage before changing direction.
It is most convenient to determine the trend at higher periods. For example, if you are an Intraday Trader who often trades within a day, you should look at the PSAR on the H1/H4 timeframes.
Features of Using The Indicator
The main purpose of the PSAR is to determine the direction of the trend.
If the Parabolic points are above the price, you face a downtrend.
When the points are under the price, the trend is upward.
Now, suppose for some time, there has been a consistent formation of PSAR points under the price candlesticks. In that case, a new point above the price indicates a possible reversal of the trend from ascending to descending and vice versa.
In this regard, the following features of using the Parabolic SAR indicator in trading can be noted:
1.) The large distance between the indicator points shows the high strength of the current trend. It's dangerous to enter the market at this time since you can easily get trapped in a pullback.
2.) The closer the PSAR points are to the price, the higher the probability that a price reversal will occur;
3.) Points can be used as a reference point for setting stop losses, as well as for manual trailing stops. When a new point appears on the chart, it is usually higher during an uptrend or lower during a downtrend. You should move/adjust the stop loss level to its level. As a result, when the price reversal occurs, you will not only lose anything, you will even be able to fix your profit.
4.) It is recommended to use the PSAR on large timeframes from H1 since, due to intense market noise, many false signals can be observed on smaller time frames.
Would you try to use the PSAR with your favorite Trading strategy and see how it improves your trend analysis and trading results?
Share with us in the comment section below if you would practice with the PSAR application.
Also, remember to share your trading results with us when you do.
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