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The Parabolic SAR
The Parabolic SAR is a technical indicator used to determine the direction that an asset is moving, as well as providing entry and exit points. Sometimes referred to as the “stop and reversal system,” the parabolic SAR identifies potential reversals in the price movement of traded assets.
How the indicator works
The indicator appears on a chat as a series of dots placed either above or below the price bars. A dot below the price is usually seen as a bullish signal, while a dot above the price is used to show that the bears are in control and that the momentum is likely to remain in the downtrend. When the dots flip, it indicates that a potential change in price direction is under way. For example, if the dots are above the price, when they flip below the price, it could signal a further rise in price.
As shown on the chart above, as the price of an asset increases, the SAR dots will rise slowly initially and then pick up speed and accelerating with the trend. The SAR starts to move a little faster as the trend develops, and the dots soon catch up to the price. The indicator works perfectly for capturing profits during a trend, but highly unreliable in ranging/sideway markets as it can lead to many false signals.
Due to its unreliability in markets trading in sideways, it is better to have several indicators confirm a certain signal than to rely solely on it. Usually, traders complement the SAR trading signals by using other indicators such as a stochastic, moving average, or the ADX. For instance,
SAR sell signals are much more compelling when the price is trading below a long-term moving average. The price below a long-term moving average suggests that sellers are in control of the direction and that the recent SAR sell signal could be the beginning of another movement lower. Similarly, if the price is above the moving average, traders focus on taking the buy signals (dots move from above to below). The SAR indicator can still be used as a stop-loss.
