Parabolic Stop and Reversal {SAR}

Parabolic SAR

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Up until now, we’ve looked at indicators that mainly focus on catching the beginning of new trends.  And although it is important to be able to identify new trends, it is equally important to be able to identify where a trend ends. After all, what good is a well-timed entry without a well-timed exit?  

One indicator that can help us determine where a trend might be ending is the Parabolic SAR (Stop And Reversal).  A Parabolic SAR places dots, or points, on a chart that indicate potential reversals in price movement. From the chart above, you can see that the dots shift from being below the candles during the uptrend, to above the candles when the trend reverses into a downtrend.

Using Parabolic SAR

The nice thing about the Parabolic SAR is that it is really simple to use.  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.  This is probably the easiest indicator to interpret because it assumes that the price is either going up or down.  With that said, this tool is best used in markets that are trending, and that have long rallies and downturns.  You DON’T want to use this tool in a choppy market where the price movement is sideways.