The Parabolic SAR is a popular technical indicator which helps traders highlight the end of a trend. Due to this it is frequently used for exit signals in trend following trading strategies. In this article we are going to show you how to use it and how to implement it in your trading system.
The SAR abbreviation comes from Stop And Reversal. The indicator is developed by J. Welles Wilder Jr. and published in his 1978 book “New concepts in technical trading systems”.
The indicator appears on the chart as a series of dots or points. The dots are placed below the current price when there is an up trend. Vice-versa the dot is above the current price when there is a down trend. As the price continues to rise or fall, the dots continue to rise or fall respectively along it as well. Therefore when the dot switches its position from below/above the chart there is a signal that the trend is reversing.
How to use Parabolic SAR in your trading strategy?
The good thing about Parabolic SAR is that it is very clear and easy to use. When the dots are below the candles, you have a bullish signal (buy). When the dots are above the candles, you have a bearish signal (sell).
As you can see it is quite easy to follow and gives very obvious signals while the markets are trending. However the the indicator can create a lot of false signals in choppy markets when the price are moving sideways in a range.
You can use the indicator for entry signal confirmation in trend following systems. Additionally it works very well for exiting signals and setting stop loss orders. In a trending market you can have a trailing Stop Loss to following the level of the dots.
Here you can find a few examples of trading systems using Parabolic SAR: