Parabolic SAR
Up until now, we’ve looked at
indicators that mainly focus on catching the beginning of new
trends. And although it is important to be able to
identify new trends, it is equally important to be able to
identify where a trend ends. After all, what good is a well-timed entry
without a well-timed exit?
One indicator that can help us
determine where a trend might be ending is the Parabolic SAR
(Stop And
Reversal). A Parabolic SAR places dots,
or points, on a chart that indicate potential reversals in
price movement. From the chart above, you can see that the
dots shift from being below the candles during the uptrend, to above the candles when the trend
reverses into a downtrend.
Using Parabolic SAR
The nice thing about the Parabolic SAR is that it is really
simple to use. Basically, when the dots are below the
candles, it is a buy signal; and when the dots are above the
candles, it is a sell signal. This is probably the
easiest indicator to interpret because it assumes that the
price is either going up or down. With that said, this
tool is best used in markets that are trending, and that have
long rallies and downturns. You DON’T want to use this
tool in a choppy market where the price movement is sideways.
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