Chapter 4 Parabolic SAR
Parabolic SAR stands for 'parabolic stop and reverse'. It assists in determining the end of a trend and to supplement other trend-following systems. The indicator plots a curved pattern on a price chart, which describes potential stop and reverse levels.
On a chart, the indicator appears as a series of dots placed either above or below the price bars. The dots appear below price indicia on an uptrend and above them on a downtrend. Basically, when the dots are below the candles, it is a BUY signal; when the dots are above the candles, it is a SELL signal.
The signals are used to set stop losses and profit targets.
How Parabolic SAR Works
The change in the direction of the dots produces trade signals which can produce a profit when the price makes big swings. However, the indicator is not as reliable in a flat or ranging market.
When the price of a asset rises, the dots also rise. The pace accelerates with the trend. The Parabolic SAR works well for capturing profits by entering the trade during a trend in a steady market.
It may produce false signals when the price moves sideways, and the trader should expect small losses or small profits. The indicator can also be used to set stop loss orders. This can be achieved by moving the stop loss to match the level of the SAR indicator.
How to Trade Using the Parabolic SAR Indicator
In the example above, the Orange dots mark where you should place your stop level. Notice how the stop always trails the market movement – the stop only ever moves closer to the market, and never
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