Parabolic SAR is both a reversal and trend following indicator. PSAR allows the market to “speak” to self-identify movement depending on its speed and actual direction. This is a solid foundation for a trading strategy, the main thing is to know the nuances of using the indicator in binary options trading.
The full name of the indicator is Parabolic Stop and Reverse (stop and reverse). The name comes from the fact that the movement of the indicator resembles a parabola. Welles Wilder is the author of the algorithm underlying the indicator, a well-known American trader, a specialist in technical analysis.
He also wrote the book, where, in addition to the Parabolic itself, several well-known technical indicators (RSI, ADX, and so on) are considered.
The indicator accepts only one parameter at the entrance the acceleration step and it’s maximum. The step size is responsible for how strongly PSAR points will be attracted to the current price.
When the Parabolic points meet the price, the indicator changes its position. Points at the bottom of the price chart indicate an upward trend. On the contrary, the points located at the top indicate a downward trend.
Since the indicator is in direct contact with the price, the amount of trading noise and abnormal quotes is critical for it. Therefore, PSAR shows the best signals at relatively high TFs from M15 and above, that is, where the trends are more stable.
Parabolic trading rules are as simple as possible:
- When Parabolic changes its position from top to bottom, buy a Call option;
- When Parabolic changes its position from bottom to top, buy a Put option.
That is, the indicator signal is a change in the position of the PSAR points relative to the price. We enter the market exactly when the point changes its position, that is, on the current candle.
Binary options are contracts with fixed risks and expiration dates. Whether the price turns out to be in the profit zone or not directly depends on the time of the trade execution. Therefore, it is critical to choose an appropriate expiration time.
Expiry time calculation As the optimal expiry date for trading with Parabolic, the value of the time period two levels higher than the current one is suitable. As initial data, we take the standard timeframe progression in MetaTrader 4: M1, M5, M15, M30, H1, H4, D1, etc. For example, trading on TF M15, the expiration time should be 1 hour.
Another way to calculate expiration is by the average duration of the trend. Let me remind you that each sequence of Parabolic points is a separate trend, the duration of which is individual for each timeframe and currency pair. Knowing the average duration of the trend, we can roughly guess when it will end.
So, to calculate the average trend length, it is enough to add up the sequences of several movements in the previous history interval. Ideally, the time of the trading session on the site should correspond to your main working hours.
In this case, the average duration of the trend was 13 candles: (12 17 18 5 13) 5 13. The option expiration time should be about half of the average, that is, about 6 candles: 13/2 6.
Top tricks in trading
As we have already found out, Parabolic loves trends, and lateral movement and flat completely unsettle it. Moreover, he is very picky about trends, therefore, any abnormal state of the market immediately increases the number of false signals.
To avoid this, try to choose a watch for yourself when the market is as adequate as possible. For each instrument, this is a different time of the day depending on the day of the week and the current trading session.
Thus, it is best to look at the situation. If the market starts to move sideways, that is, it does not update the previous high low for a long time, we try not to open new deals.
The same goes for trading during news releases. If excitement is expected in the market, Parabolic will not be the best instrument for trading in such a period, and it is better to stop opening new deals for a while.