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.
Although it is important to be able to identify new trends, it is equally important to be able to identify where a trend ends. A well-timed exit is as important as a well timed entry.
How to Trade Using Parabolic SAR
The nice thing about the Parabolic SAR is that it is really simple to use. Trading with this indicator is about the simplest approach you can have in your world of trading.
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.
The image above is quite simple and that’s basically what parabolic is all about.
When the first dot appears below the price, it assumes that the price is going up and when the first dot appears above the price, it assumes that the price is going down. With this established, this tool is best used in markets that are trending, and that have long rallies and downturns.
This indicator would not favor your trade decisions when it’s used in a choppy market where the price movement is sideways.
Using Parabolic SAR to exit trades
Check out how the Parabolic SAR worked as an exit signal in the chart below.
When the green dot appeared at the spot(parabolic SAR) the arrow pointed at in the image above, the circled price level (candle) indicates when we are supposed to sell that pair, and when the other green dot(parabolic SAR) came up under the price, that was the spot to exit that sell position.
If we kept holding on to that sell position after that green dot (parabolic SAR) had appeared under price hoping the price will continue going down, all the profits we have accrued will be eroded because the trend reversed and moved against us from there.
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