Parabolic SAR

Parabolic SAR is a powerful tool that helps analyse trends. SAR stands for “Stop and Reverse”. It means that the indicator can not only determine a trend, but also indicate when it is time to close a trending trade and look in the opposite direction. The indicator was developed by J. Welles Wilder, who is also known for creating tools such as ATR and RSI.

How to implement

The Parabolic SAR is included in the default set of MetaTrader. You can add it to the chart by clicking on “Insert” – “Indicators” – “Oscillators” and then selecting “Parabolic SAR”.

The indicator has 2 parameters that you must set: “step” and “maximum”. Their default values are 0.02 and 0.2. A step is the size of the acceleration factor. The acceleration factor starts with this value and then increases by the step size with each new maximum (or minimum for a downtrend), up to the value defined by the maximum parameter. You can start with the default parameters of the indicator and then adjust them to the asset you trade, the timeframes you use and your trading style. Depending on your choice, the indicator can be more or less price sensitive. The higher the acceleration factor, the closer it will be to the price. However, you should not set it too high, as in that case there will be too many reversal signals. Wilder recommended not to set the maximum above 0.22.

How to interpret

The Parabolic SAR is very simple to use. It involves placing dots that define a trend. When the dots are below the price, the trend is up, while dots above the price point to a downtrend. When the trend changes direction, the Parabolic SAR gives an entry signal. It signals a bearish reversal when it crosses the price to the upside and forms 3 descending dots above the Japanese candlesticks. The Parabolic SAR signals a bullish reversal when it crosses the price to the downside and forms 3 ascending dots below the candlesticks.

The indicator offers a great help in determining exit points. The solution is simple: close the buy trade when the Parabolic SAR returns above the price and close the sell trade when it returns below the price. In this way, you will hold open positions only in the direction of the indicator’s movement. In addition, the Parabolic SAR provides a framework for trailing stops. In an uptrend, the indicator will increase following the price rise. Move your stop loss order from one point to the next to limit risks and close in profit.

Conclusión

The Parabolic SAR is a powerful and unique indicator. It works best in a trending market with long rallies and declines. However, in a ranging or consolidating market, there is a high risk of receiving false signals. The Parabolic SAR will work well in combination with other technical indicators, e.g. ADX. If the ADX confirms the presence of a strong trend, you can use the Parabolic SAR with greater confidence. В разделе “Indicators” создать подраздел “Bollinger Bands” Bollinger Bands (BB) are a classic trend indicator developed by John Bollinger. His book Bollinger on Bollinger Bands contains a detailed description of how to use them alone and with other technical analysis tools. BBs are very popular with traders all over the world.

About Bollinger Bands

The indicator consists of 3 lines – a middle and two outer bands. The middle band is a simple Moving Average, usually with a period of 20. The outer bands are usually set as 2 standard deviations above and below the middle band. Bollinger Bands have something in common with the Envelope Indicator. The difference is that the edges of the Envelopes are located above and below the Moving Average at the distance set in %, while the edges of the Bollinger Bands are calculated on the basis of the constantly changing standard deviation.

How to implement

Bollinger Bands belong to the default set of MetaTrader. You can add them to the chart by clicking on Insert – Indicators – Trend and then selecting Bollinger Bands.

MT will give you 20 as a period and 2 for deviation. You can change these parameters if you wish. It is recommended to use periods from 13 to 24, while the deviation should be in the range between 2 and 5. For example, it is possible to use 50 and 2.1 for longer timeframes and 10 and 1.9 for shorter timeframes. Note that the shorter the time frame, the more trading opportunities the indicator will offer. However, the number of false signals will also be higher. At the same time, when the period is large, the indicator becomes less sensitive. This is not suitable for markets with low volatility. To reach a conclusion, it would be wise to adjust the Bollinger Bands for the asset being traded. If the price crosses the upper or lower band too often, it is necessary to increase the period. If the price rarely reaches the outer bands, there is a feeling to reduce the period. The BB indicator can be used in all time frames, although it is more common for intraday. You can also apply Bollinger Bands to an oscillator that is plotted in a separate window below the price chart. For example, you can apply BB to an RSI by selecting Previous Indicator’s Data or First Indicator’s Data from the Bollinger Bands Apply to drop-down menu.

How to use Bollinger Bands for Forex Trading

1.The assumption is that the price spends 95% of the time between the outer Bollinger Bands and only 5% of the time outside them. 2.Bollinger Bands help determine how large the deviation is from the average price of a currency pair. 3.The middle line can be used as a support/resistance level while the outer edges can act as profit targets. There are also strategies that involve trading reversals of the outer bands. 4.The slope of the BB indicator and the price position relative to the middle band allow us to judge the direction of the current trend. If the Bollinger Bands have an upward bias and the price tends to be above the midline, it is an uptrend. 5.If the band bias is negative and the price spends most of the time below the midline, it is a bearish trend.

Bollinger Bands as a volatility indicator

The key feature of the BB indicator is that the lines of the indicator react to market volatility: the bands widen when volatility is high (e.g. when a major press release comes out) and narrow when it decreases. As a result, Bollinger Bands help us to notice when the market moves from a calm state to an active state. When the bands approach, they tell us that we are trading in a non-volatile market and that a volatile period is on the horizon. As a result, it is possible to expect a breakout from the recent range. You can see an example of this in the image below: the bands compress and then the price breaks above resistance and makes big moves higher.

During a trending market, if the bands widen, this points to the continuation of a trend. If they become narrow, this may indicate that the trend is weakening and could soon reverse.

Operating a movement beyond the outer edges

Generally, when the price goes beyond the outer Bollinger Band, it signals the start or continuation of a trend. If prices touch and break the upper BB indicator, it is an uptrend. If price continues to attack the lower BB indicator, it is a downtrend.

In most cases, the price does not reverse more than 4 candles beyond an outer Bollinger Band. Then a correction takes place. Note that when the market is trending, the price can spend a long time in the area/on one of the outer bands.

Operating a reversal of the outer bands

Bollinger Bands can also act as an oscillator. When the price reaches the upper band, the asset trades at a relatively high price and is considered overbought. When a price approaches the lower band, the asset trades at a relatively low price and is considered oversold. It is well known that overbought and oversold conditions lead to a correction. However, if the trend is strong, the price can remain at the upper/lower Bollinger Band or even beyond without retracing for an extended period of time, as we learned from the above excerpt. As a result, if you want to trade on the retracement of the upper or lower Bollinger Band, you will need a confirmation of the market reversal from candlestick patterns or another indicator.

The image above shows that the downward reversal from the upper BB indicator is confirmed by a bearish evening start candlestick pattern and the bearish divergence between the RSI and the price chart.

There are examples of a particular type of price action near the outer Bollinger Bands. A W low (double bottom) is formed in a downtrend and involves two reaction lows. The second low must be lower than the first and remain above the lower band. An M high is the opposite of a W low. In its most basic form, it is similar to a double top. However, reaction tops are not always the same. The first maximum may be higher or lower than the second. The use of Bollinger Bands for ‘M’ and ‘W’ signals seems to provide earlier indications than those produced by conventional ‘M’ and ‘W’ chart patterns.

Trading a crossover and a pullback from the midline

The middle line acts as a dynamic support/resistance. If the price crosses the middle BB indicator, it signals a change in the trend. Don’t forget to look for confirmations in such cases. Keep in mind that price often tests levels beyond the midline before reversal and these false breakouts could confuse traders. If the price deviates from the lower band and crosses the middle line to the upside, the upper band will be the upper price target. In a strong uptrend, prices generally fluctuate between the upper band and the middle band. As a result, in a strong uptrend, consider looking for buying opportunities in the middle band. If the uptrend is not as strong, corrections could be deeper and reach the lower BB indicator. In a strong downtrend, look for selling opportunities in the middle BB indicator. If the downtrend is not as strong, pullbacks could lift the price to the upper BB indicator.

Conclusion

The Bollinger Bands indicator is a very useful technical tool that can form a solid basis for a very good trading system. It provides dynamic support and resistance levels and visualises the level of volatility. Take the time to master this tool! Contact your account manager to learn about different indicators or even get a trading course.