The primary task of traders in the binary options market is to predict the future direction of the price, regardless of how many points it will move. Profits can be made by trading digital contracts even with minimal chart fluctuations. To minimize the likelihood of losses, it’s essential to learn to identify a trend at the very beginning of its formation. As is well-known, prices in financial markets, including binary options, move in waves. Growth alternates with decline and vice versa. Therefore, to purchase a contract at the very start of a new movement, you need to identify the reversal of the previous one. The Parabolic SAR (Stop and Reverse) indicator is a valuable tool for identifying trends in trading.
Given that the Olymptrade trading terminal is considered one of the most functional in the digital contracts industry, you can easily find the aforementioned tool in the list of pre-installed indicators.
Explanations of the Parabolic SAR
First of all, let us start with the fact that the instrument is a trend instrument, so you will find on the chart. When added to the chart on the Olymptrade platform, it appears as a series of points forming parabolic shapes above or below the price. These points visually represent potential reversal points in the trend direction. This indicator is particularly useful for traders looking to gauge the momentum of a trend and to make decisions based on trend reversals indicated by the positioning of these points relative to the price chart.
The Parabolic SAR indicator was developed by Welles Wilder Jr., a renowned figure in financial markets known for creating several influential indicators still widely used by traders worldwide. Setting up the Parabolic SAR is straightforward: you just need to adjust the parameters. Wilder typically recommends an acceleration factor of 0.02 and a maximum acceleration of 0.2, which he considers optimal for various time frames.
In practice, traders often apply this indicator on timeframes ranging from 15 minutes to 4 hours. However, these longer intervals may not be ideal for trading options. Many traders prefer turbo contracts and trade on minute timeframes for quicker decision-making and responsiveness to market movements.
How to use Parabolic SAR in trade
Understanding the Parabolic SAR indicator is straightforward. During an uptrend, the series of points forms below the price chart, while in a downtrend, it appears above. When a trend reverses, a new point emerges on the opposite side of the chart.
For trading decisions, when the parabolic points shift from above the chart to below it, it signals a potential opportunity to purchase a CALL contract. This transition suggests a shift from a downtrend to a potential uptrend, indicating a favorable moment for entering the market.
For a PUT contract, traders typically look to enter when the Parabolic SAR points transition from below the price chart to above it. This change signifies a potential reversal from an uptrend to a downtrend, indicating a suitable moment to consider purchasing a PUT contract.
To effectively use the Parabolic SAR indicator, set the contract expiration period equivalent to double the selected trading timeframe. For instance, if trading on a 15-minute interval, opt for a contract duration of half an hour.
The Parabolic SAR stands out as a robust indicator that can be utilized independently without additional tools. However, it’s crucial to acknowledge the presence of speculative market movements. Therefore, adhering to sound money management principles remains essential to mitigate risks effectively.