Parabolic Time Price is a system that always has a position in the market, either long or short. The SAR points resemble a parabolic curve as they begin to tighten and close in on prices once prices begin to trend. This explains the name –Parabolic Time Price.
Parabolic Time Price is usually charted with a bar analysis so that the stop and reverse points are easily identified. If you are long, the SAR points will be below the prices and the signal to go short will be when prices cross the current SAR point from above. If you are short, the SAR points will be above the prices and the signal to go long will be when prices cross the current SAR point from below.
When a new position is entered the SAR points will be positioned far enough away from the prices to permit some contra-trend price movement. As the market begins to trend the SAR points will move with prices and progressively tighten as the trend continues This is accomplished by the use of an acceleration factor that increase up to a given limit each time a new extreme in the direction of the trend is reached.
The most common uses of the Parabolic SAR in Binary Options:
- As a Stop and Reverse system.
Signals to stop out of the current position and enter a reverse position are when prices cross the current SAR point. For example if the SAR points are below prices, you would be long with an order to close out the current long position and enter a short position at the period’s SAR point. Once you are stopped into a short position the SAR points will be above prices and the current period’s SAR point will be the level at which you will be stopped out of your short position and enter a long position.
When applied in its origin form, the Parabolic Sar is a system that is always in the market. In order for this technique to be successful, the underlying market needs to be trending strongly. If the Parabolic SAR is applied in a non-trending market, then it is likely to have more OTM trades, because the buy signals will occur at the top of the range and the sell signals at the bottom of the range.
- As an entry binary options system in a trending market.
By using the Parabolic Sar indicator, in conjunction with an analysis that indicates market trend such as MACD, you would take only buy trades when the trend’s up and only sell trades when the trend’s down.
Acceleration factor: (default 0.02)
The Acceleration increment is the rate at which the SAR points will progressively tighten upon prices each time a new extreme in the direction of the trend is reached. A value greater (less) than 0.02 means that the SAR points will tighten more quickly (slowly) upon prices, leaving less (more) room for counter trend price movements
Maximum constant: (default 0.2)
When a new signal is given the acceleration factor will use the start acceleration as its initial value. Each time a new extreme is made in the direction of the trend the acceleration factor will increase by the value of the Acceleration increment until the acceleration factor equals the Maximum acceleration. A value greater (less) than 0.2 means that the SAR points will tighten more quickly (slowly) upon prices, leaving less (more) room for counter trend price movements.