In binary option trading, traders place trades based on whether they believe the answer is yes or no, making it one of the simplest financial trading. Binary options trading offers one of two payoff options: a fixed amount or nothing at all. That’s why they’re called binary options—because there is no other settlement possible. This simplicity has resulted in broad appeal among traders and newcomers to the financial markets. As simple as it may seem, traders should fully understand how binary options work, what markets and time frames they can trade with binary options, advantages, and disadvantages of these products. Pocket Option trading platform offers demo account and educational materials to people who want to explore trading. It also offers many technical tools to experienced traders who know how to apply their strategies for success.
Many trading strategies are based on Parabolic SAR, which reflects the market situation in real time, and most importantly, clearly indicates the beginning of a reversal of the current trend.
Appearance, parameters and signals from Parabolic SAR
The parabolic SAR attempts to give traders an edge by highlighting the direction an asset is moving, as well as providing entry and exit points. In this article, we’ll look at the basics of this indicator and show you how you can incorporate it into your trading strategy. We’ll also look at some of the drawbacks of the indicator.
On a chart, the indicator appears as a series of dots placed either above or below the price bars. A dot below the price is deemed to be a bullish signal. Conversely, a dot above the price is used to illustrate that the bears are in control and that the momentum is likely to remain downward. When the dots flip, it indicates that a potential change in price direction is under way. For example, if the dots are above the price, when they flip below the price, it could signal a further rise in price.
The Parabolic SAR indicates acceleration and maximum acceleration. Its use in financial markets was first proposed by by J. Welles Wilder Jr. He is also know as a creator of the relative strength index (RSI).
W. Wilder recommends the following settings: 0.02 and 0.2, respectively. He recommended the Parabolic SAR with medium and higher timeframes to avoid market noise and false signals.
In technical analysis, SAR indicates he following market conditions:
- Uptrend: dots are located below the chart;
- Downtrend: dots are located above the chart;
- Trent Strengthens: the distance between dots increases;
- Trend Reversal: a candle breaks a segment with the next dot on the opposite side.
Trading with Parabolic SAR
When you set up the indicator parameters you should wait for a signal to open a deal. The recommendation is to buy a contract during the initial stage of trend formation. So you need to focus on trend reversals or “breakdowns”:
- The CALL contract when the rising candle breaks the Parabolic line from the bottom up, and the next dot appears under the chart.
- The PUT contract needs when the descending candle broke the Parabolic line from top to bottom, and the next point formed above the chart.
The expiration period should be higher than the formation of two candles. For example, if you use the H1 timeframe, the expiration should be shorter than two hours.
The Parabolic SAR performs best in markets with a steady trend. In ranging markets, the Parabolic SAR tends to whipsaw back and forth, generating false trading signals. The indicator tends to produce good results in a trending environment, but it produces many false signals when the price starts moving sideways. To filter out some of the poor trade signals, only trade in the direction of the dominant trend. Some other technical tools, such as the moving average, can aid in this regard.
