Parabolic SAR

In the world of short-term trading, experiences are determined by a trader’s potential to expect a certain move in the price of a financial asset. There are various indicators used to predict an asset’s future direction, but only few have proved to be as useful and easy to understand as the parabolic SAR.

Let’s take a look at the basics of this indicator and show how you can absorb it into your trading strategy.


Parabolic SAR – The Indicator

The parabolic SAR (Stop and Reversal) is a technical indicator that can assist traders to figure out where a trend might be ending. It places dots or points on a chart that indicates potential reversals in price movement.

One of the most important detail to remember is that the positioning of the “dots” or “points” are used by traders to generate transaction signals depending on where the dots is placed connected to the asset’s price. A dot placed below the prices is considered a bullish signal, which will cause traders to expect the momentum to remain upward direction. On the other hand, a dot placed above the prices is used to show that the bears are in control and that the momentum is likely to remain downward.

Here is how to trade using Parabolic SAR:

The indicator is very easy to understand. Basically, when the dots are below the candles, it is a BUY signal, and when the dots are above the candles, it is a SELL signal.

However, there is a catch. This tool is not recommended to be used in a choppy market wherein price movement is sideways.


Parabolic SAR and the Short Sale

The parabolic SAR is highly valuable since it is one of the easiest methods available for strategically setting the position of a stop-loss order. As you become more familiar with technical indicators, you will see that the parabolic SAR has built up a positive reputation for its role in assisting many traders’ lock-in paper profits that have been recognized in a trending environment.

You can also see professional traders who use this indicator to help in knowing the time to cover their short positions. It is important to remember that this indicator is extremely mechanical and will always assume that the trader is holding a long or short position.

What about Parabolic SAR to EXIT trades?

Parabolic SAR can help you figure out whether you should close a trade or not.

The chart below shows that the trend looks like it is going down for an amount of time, but the three (3) dots formed below the candles. These three dots mean that the trend is over and indicates for you to close your trade.

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