Parabolic stop and reverse, or better known as Parabolic SAR, is a trading indicator designed to detect trend movements. Created by Welles Wilder, it is by nature a lagging indicator used by market traders to capture profits in long trends and as a stop-loss indicator. In this article, we explain how you can use the Parabolic SAR indicator.
Contents:
- How does the Parabolic SAR indicator work?
- Basic buy and sell signals
- Parabolic SAR trading strategies
- Applying a Parabolic SAR indicator strategy
- Conclusions
Interact with the underlined words and green dots to get additional details and explanations.
How does the Parabolic SAR indicator work?
You can use Parabolic SAR on stocks, commodities, currencies and other financial assets. As far as simplicity goes, few indicators are easier to put into practice and use than this tool. Once the indicator is activated, dots will appear to annotate the price chart.
When the trend is moving upward, dots will appear below the candlesticks.
Conversely, the dots will appear above the candlesticks when there is a downward trend, as shown below.
Basic buy and sell signals
As the SAR indicator follows price trends, its dots provide users with a buy signal when prices are rising and a sell signal when prices are falling.
The quality of the signal depends on the asset being analyzed. Assets within long rallies and lengthy declines produce higher-quality signals than assets with non-trending or sideways price movements.
Parabolic SAR trading strategies
Traders also use the SAR indicator to time their trades. The SAR indicator dots change position relative to trend direction, and this could be used as a signal that a new trend has begun.
Trades can be executed as soon as the SAR dots change position or after holding their new position for a specific period.
In Fig. 2 below, a trader that considers the fourth SAR dot of a new trend as a trade entry or exit point could enter a buy trade in early May and exit that same trade in the middle of June, pocketing a 9.3% gain with the trend changes in Brent crude oil this year.
Applying a Parabolic SAR indicator strategy
Despite the indicator’s simplicity, getting consistent market returns can still be challenging. Applying the SAR indicator on non-trending assets can easily lead to losses and frustration.
For creating an effective Parabolic SAR strategy, traders often have to rely on other technical indicators such as moving averages, RSI and other technical indicators to help evaluate and determine trend strength.
Conclusions
Parabolic SAR is an interesting tool that has a place in any strategy. Using this indicator, you can quickly determine a trend, the right time to buy an asset or close your trading positions. If you want to get a little more familiar with the concept of detecting trends, we recommend our article on the basics of trendline strategy.
You can learn more about the Parabolic SAR indicator by visiting the Olymp Trade Help Center.
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