Parabolic SAR Indicator is a trend indicator, which tells to traders about the price curve and trend direction alongside the reverse direction. It is easy to understand the concept of using it first. Parabolic SAR appears as a set of dotted lines, where each point represents a fixed time period.
When the price is above parabolic SAR dots, traders should only place long positions. Once parabolic SAR dots come to the top of the value – it’s time to turn the trade status into a short one. Parabolic essence allows virtually to be in trade at all times.
- PSAR is above the dot price – downtrend.
- PSAR is below the dot price – uptrend.
How to trade with Parabolic SAR indicator
However, doing trade with parabolic SAR is not so easy; Not all parabolic SAR reversal signals can be a profitable trade. Let’s turn to the advice provided by the developer of parabolic SAR indicators – J Wells Wilder. He has suggested that first to use ultraviolet SAR, stop stopping and find the best exit.
The way foreign currency traders used Parabolic SAR is by installing a stop loss order at the most recent SAR dot level displayed on the chart. The stops are connected with each new SAR Dot until the trend remains intact. Once the Parabolic SAR indicator changes its position – SAR dots appear in the opposite direction of the price – trade stops.
Wells Wilder does not recommend using ultraviolet SAR as a single indicator. The main reason for this is: Parabolic SAR can easily make whip-saws (false signals) during the consolidation period of the market. Parabolic SAR works best during strong trending periods, with Wilder himself estimating that this time is about 30%.