How to trade Perabolic SAR

Perabolic  SAR

The Parabolic Stop and Reverse (SAR) indicator combines price and time components to generate buy and sell signals. The Parabolic SAR is also effective as a tool to determine where to place stop loss orders.

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 image 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.

Parabolic SAR Buy Signal

Buy when the price closes above the upper Parabolic SAR. When the Parabolic SAR changes from being above price to below price, then the stock, futures, or currency trader should "stop" and buy to cover their existing shortsell and "reverse" direction and buy to go long.

Parabolic SAR Sell Signal

A sell signal is generated whent the price closes below the lower Parabolic SAR. At the time that the Parabolic SAR changes from being below price to being above price, the trader should "stop" and sell to exit their existing long trade and "reverse" direction and sell to go short.

The Parabolic SAR is an effective stop loss placement tool for two reasons:

1. It acts as a trailing stop:

Rather than putting in one stop loss below where a trader entered a long position or above where the trader entered a short position, using the Parabolic SAR as a trader's guide, the stop loss is gradually raised for a long position and lowered in a short position, effectively locking in any profits.

2. It acts as a time stop:

Time stops are used by traders because they enter in buy or sell orders expecting a certain move to occur. If the expected move never occurs and the reason the trader initiated the trade is no longer relevant, then the trader should exit their trade. Similarly, the Parabolic SAR incorporates time into its calculation making sure a stock, future, or currency trade is working for the trader, if the trade is not moving in the desired direction, the Parabolic SAR will signal an exit.