What Is The Parabolic Sar?
The Parabolic SAR or Parabolic stop and reverse was developed by J. Welles Wilder. The Parabolic SAR is used by the traders to predict the direction of an asset as well as help in determining entry and exit points.
One indicator that can help us determine where a trend might be starting or ending is the Parabolic SAR (Stop And Reversal). A Parabolic SAR places dots, or points, on a chart that indicates potential reversals in price movement.
From the image below, 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.
Tiny dots moving along with the candles
How to Trade Using Parabolic SAR
The Parabolic SAR has the advantage of being quite simple to operate. We mean REALLY easy. When the dots are below the candles, it indicates a BUY signal. It is a SELL signal when the dots are above the candles.
1. Trending Market
The Parabolic SAR is best used when the market is trending; that is when the market has long rallies in either direction and have small corrections. It is advisable not to trade with the Parabolic SAR in a sideways market.
2. Higher time frames
If the time frame is small, Parabolic SAR will generate too many signals, and it might offer contradictory signals. On higher time frames, the trade will move slowly, and this will avoid false signals as most of the market noise is eliminated.
3. Better to use as an exit indicator
Parabolic SAR is used mostly as an exit indicator. Close buy position when price moves below the Parabolic SAR and close sell position when price moves above the Parabolic SAR. It also provides a stop loss level that moves closer to the market price regardless of the market direction.
An exit / enter signal
This is arguably the simplest indicator to understand because it assumes that the price is either rising or falling. That being said, this method works best in markets that are trending and have long rallies and downturns.
⚠️ This tool should NOT be used in a turbulent market with sideways price movement.
How to use Parabolic SAR to Enter/Exit Trades
You can also utilize Parabolic SAR to help you decide whether or not to close your deal or start a newtrade.
See how the Parabolic SAR functioned as an entry and exit signal in the SPY chart below.
Monday, 21 March
Having said the above, the Parabolic Sar isn't fool proof. The dots may change direction during a trade so it is best to use it with other signals and indicators such as volume, candles and chart patterns. Try it out for yourself! 😉
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