Parabolic SAR

Parabolic SAR is an effective tool to help you determine where to place buy and sell orders.

It is the easiest technical indicator to use because it assumes that prices over time always move in one of two directions: up or down.

Parabolic SAR stands for Parabolic Stop And Reversal.

It is a "momentum" indicator, meaning that it measures the rate of change, or how fast prices are changing.

It generates signals when price trends have a higher-than-normal probability of stopping and reversing (i.e. switching directions).

This indicator uses price data from a specific length of time to calculate buy and sell targets. Each target is displayed as a "dot" or point on the price chart.

Chart courtesy of Stockcharts.com

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Why use Parabolic SAR?

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For starters, it's pretty simple.

When prices are above the "dots", the price is in an uptrend. When prices are below the dots, prices are in a downtrend.

You get a signal or trigger when the "dots" switch positions (from below the price to above the price or vice versa). This means the has reversed.

You can also use Parabolic SAR to set your trading stops. plotted on a price chart that will occasionally intersect with price due to a reversal or loss of momentum in the security in question. When this intersection occurs, the trade is considered to be stopped out, and the opportunity exists to take the other side of the market.

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How and When to Use Parabolic SAR

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This overlay is really useful for prices that are "trending", which means that the price is consistently rising or falling over a long period of time (i.e. months).

When prices are moving sideways (rising and falling within a narrow price range), this indicator switches back and forth between buy and sell, potentially creating many trades with little or no profit.

Chart courtesy of Stockcharts.com