Parabolic SAR: How Crypto Traders Use It to Catch Trends

Trend-following indicators are a set of tools which are very useful in trends. Crypto traders and forex traders love trend-following indicators. This is because trends are powerful in the crypto market and when there is a bull run, these indicators can help traders print money. Among these indicators one is especially popular and powerful, Parabolic SAR. It helps traders identify when a trend might be changing direction by placing dots below candles in uptrend and above candles (bars) in downtrends. These tools are handy for major cryptos like Bitcoin and Ethereum and we are going to dissect its usage and parts in this compact guide.

What is the Parabolic SAR indicator?

Parabolic SAR indicator is a technical analysis tool that was introduced by J. Welles Wilder Jr. (creator of RSI). The SAR means Stop and Reverse as the indicator places dots above or below price which change direction according to current market conditions. The parabolic SAR indicator is free to use and helps visualize where the price goes and where you might want to look for entries. By placing dots, the indicator makes it visually simple to spot price action, which makes it very helpful especially for beginner crypto traders. It objectively shows current price direction which is very useful to avoid subjective judgement. At its core, dots below the price usually are characteristic of an uptrend and when it places dots above the price, it indicates that the market might be in a downtrend.

Calculation

The Parabolic SAR is calculated using an acceleration factor (AF) and an extreme point (EP). The AF determines how quickly the SAR value moves toward the price, typically starting at 0.2 and increasing by 0.02 each time a new high (in uptrend) or new low (in downtrend) is reached, up to a maximum of 0.20. The extreme point or EP represents the highest or lowest price reached during the current trend. By combining these two elements, the SAR trails the price, speeding up as trend strengthens and slowing down before potential reversals. The one major drawback here is that if the candle is super large due to an important news release or macroeconomic event, it might force the SAR to switch the direction of its dots, which should not be accepted as a valid signal.

Why Parabolic SAR matters for crypto and forex traders

Parabolic SAR provides adaptability to fast-moving markets like BTC/USD and ETH/USD. When markets are trending, the indicator is very accurate and helps traders join on pullbacks. While it is more responsive and less laggy than moving averages, it still tends to generate many false signals, especially in ranging markets when price struggles to choose dominant direction. Here is the typical scenario where SAR shines: BTC/USD is in uptrend then it pulls back for some time and Parabolic SAR changes direction to bullish. The trader waits for the price to rebound and when SAR also switches direction and places below the candle, it might be a good time to follow the uptrend continuation. Despite its potential, the indicator can not be used as a standalone indicator and traders should combine it with trend structure and discipline to avoid impulsive and emotional trading behavior.

How to use Parabolic SAR

Here is a step-by-step guide on using the Parabolic SAR indicator in your trading:

• Step 1. Apply indicator to the chart, by choosing it from indicators tab
• Step 2. Adjust the acceleration factor if your strategy requires so, if not, leave it as it is (default 0.02, max 0.2)
• Step 3. Wait for reversals when dots switch sides

When the market is in a strong uptrend, and Parabolic SAR dots above the price and suddenly it flips and now appears above the price. It might indicate that the current market strength is fading and reversals might occur. To make the indicator even more accurate, you can combine it with other popular tools like RSI or MACD to ensure you pick only highly reliable signals.

One powerful usage for Parabolic SAR indicator is to use it for trailing stop loss as trend develops.

Catching crypto trends using Parabolic SAR indicator

Professional crypto traders use Parabolic indicators to catch trends or detect when it might end. The simple trend-following system using parabolic SAR is as follows:

Buy when SAR dots flip below price after a confirmed higher low or sell when opposite conditions appear. If you add support and resistance confirmation, the indicator becomes even more useful; when the price breaks important resistance or support level and SAR also agrees with the break of structure, it might be a good time for entries. Remember always to backtest your Parabolic SAR-based strategies on a demo account to check its viability.