Free Forex Charts: The Parabolic SAR

There are many free forex charts available through brokers or charting services, enabling the forex trader to compare different indicators on which to base his trades. One of these indicators is known as the Parabolic SAR.

This indicator was developed by Welles Wilder. 'Parabolic' is a reference to the mathematical shape of the parabola which is like a cone with a rounded tip. It is not necessary to understand the calculations that produce this, since you can see the result clearly in your charting package. This is fortunate because they are too complex to do easily by hand.

SAR stands for Stop And Reversal. As you might expect, this relates to the moment when a price stops moving in one direction and reverses to move the other way. Clearly it is very useful to know when this is about to happen so that you can close out successful trades at the peak of their profits. This is what the Parabolic SAR on free forex charts aims to tell you.

So you would not normally use it to signal the beginning of a trend. You would consult other indicators for the best moment to open your trade, and then use the Parabolic SAR to indicate the best moment to close it.

The indicator appears as a series of dots above or below the chart of current prices. Usually it is used in conjunction with a candlestick chart, so you will see the dots below the candles during an upward trend and above the candles during a downward trend.

If you have an open trade following a trend into profit and you are watching for the best moment to close it, you will be waiting for the dots to cross the line of candles. This is the indication that the trend is beginning to reverse and you should exit the market swiftly.

Alternatively you can use the Parabolic SAR to place stops, especially if you use the trailing stop. You simply set your stop at the point indicated by the current dot. When the trend is strong, this will be a long way from the current price so your stop will not easily be triggered. As the trend slows, the dots approach the current price, tightening up the gap. When a reversal is indicated the stop will be triggered by just a small movement. When the Parabolic SAR is accurate this pattern can bring you greater profits than simply setting your stop at a constant distance from the current price.

This is not a tool for scalpers. It is not so useful for short term fluctuations in a choppy market. The indicator is most reliable over real trends lasting several hours or days. If your system is based around this type of trend trading, you will find the Parabolic SAR a useful tool to maximize your profits with free forex charts.