Parabolic SAR tends to give traders an edge by highlighting the direction an asset is moving, as well as providing entry and exit points. In this article, we’ll tackle the basics of this indicator and show you how you can incorporate it into your trading strategy. We’ll also look at some of the drawbacks of the indicator.
KEY TAKEAWAYS
- The parabolic SAR indicator, developed by J. Welles Wilder Jr., is used by traders in determining the trend direction and potential reversals in price.
- Technical indicator uses a trailing stop and reverse method called “SAR,” or stop and reverse, to identify suitable exit and entry points.
- Parabolic SAR indicator appears on a chart as a series of dots, either above or below an asset's price, depending on the direction the price is moving.
- A dot is placed below the price when it is trending upward, and above the price when it is trending downward.
The good thing about the Parabolic SAR is that it’s a tremendously easy tool to use. In essence, when the points are below the candle sticks, it means a “buy” signal has occurred. Conversely, when the points are above the candlesticks, this means a “sell” signal has occurred. As this indicator only has two outcomes, that is, to buy (Uptrend) or sell (Downtrend), it is one of the simplest of all technical tools to utilize for spotting trend reversals
SUMMARY
Parabolic SAR is used to gauge a stock’s direction and for placing stop-loss orders. The indicator tends to produce good results in a trending environment, but it produces many false signals and losing trades when the price starts moving sideways. To help filter out some of the poor trade signals, only trade in the direction of the dominant trend. Some other technical tools, such as the moving average, can aid in this regard.