How to trade using Parabolic SAR?

A parabolic SAR was developed by J.Wells Wilder in 1978, the same guy who developed RSI,ATR,and ADXUnlike these other indicators, the parabolic SAR,can tell you that the trend is likely to end.

It is a trend following indicator in form of parabolic dots below the price in an uptrend and above the price for a downtrend. As the dots get closer, it indicate a potential reversal points in price movement as it follows price and as the widen, it indicates a strong trend a head.

SAR stands for “ Stop And Reverse.”

Like the name suggests, it stops and reverses when trend reverses or breaks below or above the it. let’s have a look at the chart below.

If you can to critically look at the indicator on the chart above, as the indicator moves near the price trend it gaps a bove or below the price following a change in the price direction.

Dots are below the prices during an uptrend and above when its a downtrend. As it stops to reverse, we will see a change in the movement of the dots before and immediately after changing direction. The dots  get closer detecting a probable change in trend direction or as a sign of congestion on the market chart.

The stop and reverse indicator cross over gaping to the upper side if price has been in an uptrend signaling a down reversal and the opposite is true when price is a downtrend. The dots cross to the downer side signaling a coming uptrend.

Parabolic SAR works better in trending markets than ranging markets.

How to trade parabolic SAR.

Looking at our chart above;

  • When the dots cross to the upper side of the price, that’s an indication for a bearish reversal. This gives you a sell signal.
  • If the dots cross to the lower side of the price, its an indication that the trend is likely to reverse upwards giving a buy signal.
  • Buy when the dots are below the price movement and sell when above.

Take profit levels/Exits

You can use the same indicator to identify your exit levels, as the indicator show signs of change in trend direction  you can prepare for either an entry or exit position.

Exit a buy trade when the dots cross to the upper side of the price movement and sell position when the dots cross to the down side of the price movement.



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