Profitable options with the Parabolic SAR

• VFX Blog
• For beginners

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:

• 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!