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Profitable options with the Parabolic SAR

Profitable options with the Parabolic SAR

All traders know that the maximum profit can be obtained only by trading with the trend. An option can be opened with a "long" expiration, which makes it possible to calmly wait out the current drawdown’s and, on the contrary, trade a series of short-term transactions. But how to determine when the trend started, more importantly, when it will end. Find out how to make money on binary option with Parabolic SAR indicator.


The full name of this trend tool is "Parabolic Stop and Reverse" (P-SAR, parabolic stops and reversals). Developed by the famous American trader Wells Wilder, a full description can be found in his book "The new concept of technical Analysis". 


Indicator calculation and settings


On an uptrend, the indicator value is higher if the closing price of the current candle is higher than the previous one and correspondingly lower when the market is declining. At the same time, at each next step, the acceleration value (ACCELERATION) is doubled and the indicator chart becomes "closer" to the price. This way you can indirectly determine the strength of the current movement - the closer the indicator is, the more reliable the signal of a quick turn from exact binary option strategy. The P-SAR formula is as follows:



For CALL raise options:

 

SAR (i) = ACCELERATION * (HIGH (i - 1) - SAR (i - 1)) + SAR (i - 1)

 

For CALL fall options:

 

SAR (i) = ACCELERATION * (LOW (i - 1) - SAR (i - 1)) - SAR (i - 1)

 

Parameters:

  • SAR (i - 1) - Parabolic SAR indicator on the previous candlestick;
  • ACCELERATION (AF) - acceleration value;
  • HIGH (i - 1) – price high of the previous period;
  • LOW (i - 1) – price low of the previous period.

 

The initial acceleration value is set to 0.02. Thus, the final result will be at a distance of 2 percent from the previous price max/min. On the next candle, the AF increases by another 2% to a maximum value of 0.20.


In parts of a long trend towards 2-3 consecutive highs/lows, the AF parameters are set to 0.8, and in the case of nine extremes in a row, a maximum acceleration of 0.20 or 20% is used.


The increase in initial acceleration leads to greater sensitivity, which has a positive effect on medium- and low-volatility assets and trading sessions (such as Asia on Forex). Accordingly, the adjustment to the reduction makes the P-SAR more "slow" and this increases the reliability of signals on the European and American. 


Parabolic SAR for binary options strategy


The strategy is extremely simple and accessible even for beginners: we open a CALL-option when the indicator points move below the price chart, respectively, a PUT-option when they are above the price. Let's see an example:



Next, follow the basic principle of trend trading: we are waiting for confirmation from other instruments and real binary options signals, in our case; these are Moving Averages of the Bollinger Bands.

Advantages, disadvantages, recommendations for use...

  • The main advantage of the indicator is its clarity. There is no need to look at the moving average crossover or confirm the breakout is true, which is a problem for beginners, especially when there are several Moving Averages on the chart. P-SAR has moved to the other side of the price chart, and you can already open/close an option. Example of a complex strategy using Parabolic – “Shot”.
  • The visual simplicity of the application has a downside. Among the technical analysis tools, it is MA that has the maximum lag relative to the current market. This means that you can not only lose a significant share of the trend, but also enter the market on the speculative actions of large players, followed by a rapid reversal and unprofitable expiration. Never add additional moving averages to the Parabolic SAR, it can only confuse the situation!
  • Two classic methods work best to improve signal accuracy: using overbought/oversold oscillators (see trade strategy section) and switching to older timeframes from the M30 and above. There are too many "noise" and false free binary options signals in smaller intervals! 

Let's move on to choosing the expiration date. In this case, the parameters of the option expiration date are calculated on the basis of a larger (at least two orders of magnitude) timeframe. For example, for М15, expiration should start from one hour. This approach works well for volatile and cross pairs such as EUR/GBP or GBP/JPY.

Beginner binary traders should choose a different approach – to calculate the expiration by the average duration of the trend, which is shown by each individual section of the Parabolic. For each trading asset, it is different, but for the forecast, it is enough to look at the history on the selected timeframe for the last 2-3 months. As an example of how to use expiration, let's take a look at the BTC/USD pair in the M15 interval:


Based on the chart, the average duration of the uptrend trend (17 + 12) = 29 candles, the downtrend will be (15+18) = 33 candles. The maximum recommended expiration is equal to the third part of the average value or 10 candles (30/3) of the working timeframe. It should be understood that such calculations of binary options trading signals are approximate; you need to constantly monitor the current situation. It is good when trends on average become longer; the main thing is that they do not become shorter with quick corrections and rollbacks!

  • Do not open trades on the indicator at the time of the release of strong fundamental news and statistics. Here you need a non-indicator strategy using range options such as “Touch/No Touch” or “Go Outside/Stay Inside” with an expiration of no more than 5-10 minutes.

Summarize. Parabolic SAR is a technical indicator that has shown a positive result on all financial assets (currency pairs, stocks, futures, stock options). It reliably shows the change in trend, but only on sufficiently "long" time frames. And naturally, you shouldn't use it on a sideways market (flat), even if the range of price fluctuations is 30-40 points. It is better to watch here how binary options signals work inside the channel, such as Bollinger bands. Although they are built on the same Moving Average, the signals of a rebound and a breakout of their borders are more reliable.

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