This article continues our forex education in technical analysis, looking at charts and indicators. Here we will focus on the indicator known as the Parabolic SAR (Stop And Reversal), developed by Welles Wilder.

Most indicators involve identifying a trend in price movements, which of course is a very important skill to have. The trend is your friend as they say, and traders need to be able to place orders as accurately as possible at the start of a new trend. But at the same time it is important to know when a trend is ending, so that you can close your trade. If you do not do this, you could easily see the market wiping out all of your profits and turning a winning trade into a loser.

This is where the Parabolic SAR comes into play. Its calculations are complicated and fortunately you do not need to understand that side of it because any good charting package will produce the indicator for you automatically. It appears as a series of dots above or below the prices which can indicate a possible reversal in the trend.

The dots will normally be below the candles during an uptrend and above them during a downtrend. When the dots cross the line of the candles or line that charts price movements, you have a signal that the trend is reversing and it is time to exit.

You can also use the dots to place trailing stops. In a fast moving market this may be a better way to ensure you close out a profitable trend as soon as the reversal takes hold, rather than relying on watching the chart every moment.

During most trends the Parabolic SAR will indicate a wider trailing stop at the beginning of a trend, tightening up as the trend gets under way. This means that toward the end of the trend the stop will be triggered by fairly small movements in the price. At this point meaningless whipsaws are less likely and a small change in direction is more likely to be the beginning of a reversal, so using the Parabolic SAR to set trailing stops can help to protect your profits.

The Parabolic SAR is best used during actual trends, rather than short term fluctuations. You will already have determined the existence of the trend using other indicators and you can start to take account of the Parabolic SAR once you can see that the trend is established and moving in the right direction. It is not so useful in a sideways or choppy market.

Although mathematically complex, the Parabolic SAR is straightforward to use. You should be able to increase your profits from successful trades by adding this indicator to the basket of tools that you have mastered through your forex education.

Forex Trading – Parabolic SAR

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Parabolic SAR

I am using Parabolic SAR as part of my trading system. I would like an email alert based on this indicator as soon as a new dot appears signalling a change in direction. 

Parabolic SAR

In the world of short-term trading, experiences are defined by a trader’s ability to anticipate a certain move in the price of currencies. 

Understanding Parabolic SAR

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How to trade Forex With A Parabolic SAR

Let’s go back to the advice given by the Forex parabolic SAR indicator developer – J. Welles Wilder. He suggested using the Forex parabolic SAR, first, for the trailing stop and find out the answer.

One of the most important things you can learn in any forex trading education is how to keep to your chosen system or systems in a consistent way.

Hopping from one thing to another will kill any chance you have of making profits, but we are all tempted from time to time. If you find it hard to keep to one trading system, here are some techniques that may help you to learn to be consistent.

1. Consider carefully before you decide to follow any system. One successful businessman has said that the secret of his success was thorough research before a decision, and then sticking to it like iron. You need to be sure that your system is profitable … not necessarily the very best. And you need to be comfortable with all the actions that it will require you to take, whether things are going well or badly.

2. If you have problems with self discipline in other areas of your life, use those to train yourself in the skill before you start live trading. Do not pick the thing that you have most trouble with, but something that you could fairly easily master. It might be getting up at the same time every day,

3. Allow yourself a small ‘fun’ budget or have a separate mini account for trades that look so tempting that you cannot pass them up even though they do not fit your criteria. You will almost certainly lose this money over a period of time, so be sure you can afford it. If not, avoid the temptation and track these trades on paper instead or use a demo account. Be sure to track them all because we have a tendency to remember the few that would have profited us and forget the majority that would have lost.

4. Do not discuss your trades or your system with anybody else. It is fine to ask around on forums before you have decided on your system, but do not be drawn into debate about the merits of a system after you start using it. You will quickly be swamped by negativity from people who want to believe that their own system is better. Equally, do not discuss it with non trading friends or family members. They will often be negative simply because they do not understand.

5. Do not drink alcohol while you are trading. In fact, it is better not to even look at the markets when you have had a few beers. If you see a tempting trade that breaks your normal rules it will be much harder to resist when you are under the influence of alcohol.

So even though we all love the idea of working from home in our pajamas with a beer at one elbow and the cookie jar at the other, reality is that relaxing to this extent does not combine with successful forex trading. A mind that is even slightly fuzzed by alcohol will not be able to keep to a consistent trading plan.

An automated forex robot can help you out here. You can set it up to trade automatically for you, if you are not yet able to act consistently while you pursue your forex trading education.

The most frequently used Forex Robot is

IvyBot Robot