Parabolic SAR (“Stop and Reverse”) indicator helps to determine good exit and entry points. The indicator is very simple to use. Parabolic is placing dots which define the trend.
How to interpret
Parabolic SAR has three functions.
1. It determines trends.
When the dots are below the price, the trend is bullish. Parabolic signals bearish reversal when it crosses the price to the upside and forms 3 descending dots above the candles.
When the dots are above the price, the trend is bearish. Parabolic signals bullish reversal when it crosses the price to the downside and forms 3 ascending dots below the candles.
2. It is one of the best tools to determine exit points.
Close long positions when a price gets below the indicator, close short positions when a price goes above the Parabolic’s dots. Remember that you should hold positions open only in the direction of the indicator’s movement.
3. It can show the place for a trailing stop.
Imagine you have already opened a buy order and prices are continuing to rise, so you can move your Stop Loss higher. Parabolic SAR will rise following the surging prices. The indicator’s dots will give you a clue where to move your Stop Loss.
Note that Parabolic SAR works well in a trending market with long rallies and declines. In a sideways market, however, there is a high risk of getting false signals.
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