There are cases that traders tend to look for the future short-term momentum of a stock and/or asset. Traders seek for indicators which can lead them in determining the right moment to stop orders or to exit trades. One of the widely used indicators to pinpoint the end of a trend is the Parabolic SAR.
As a technical indicator, Parabolic SAR utilizes the stop-and-reversal- method. It was developed J. Welles Wilder Jr., merely to locate the potential reversals in the price movement of traded goods. Mr. Welles saw the need to establish the market price direction first through Parabolic Sar and then the strength of the trend could be supported by other indicators.
Structure and Usage
From the image below, it shows that Parabolic SAR is comprised of dots or points which shows the price movement. When dots are placed below the candles and eventually rise, there’s an uptrend. When the dots are above the candles and follow a downward path, there’s a downtrend.
An uptrend signals the perfect time to buy whereas a downtrend means you have to sell. Take a look at the chart below. This is a chart of Amazon. From August 16 to August 25 there was a strong signal to sell, on the other hand, a buy signal came out from August 26 to September 8. It may look easy, but you have to be reminded that this method is best used in apparent trends – it means long uptrend and downtrend.
The next thing would be the use of Parabolic Sar to exit trades. A trader can locate the perfect exit period through the consistency of the first three dots. The first three dots would indicate the perfect time to exit your short trade.
As you can see in the chart below of Boeing, after the down trend last August, the stock started to climb on the 15th. Three bearish candles came up, thus three dots going up. This was an indication that Boeing would tick upward in the following sessions and would be the time to exit your short trade. On the other hand, the uptrend ended after the three falling dots on August 24, apparently a downtrend followed.
From there, let’s take a look the price movement of Boeing last September 21. The stock started with a green candle, an indication of an upward action. However, you have to wait for another candle to ensure the price movement. In case, after two green candles, a red one came up. In this case, you only need to wait for another three consistent candles.
It takes practice to get used to a specific trading indicator. Here on FSM News, we advise that traders must use the trading strategy and indicator which fits their lifestyle. It doesn’t necessarily mean that you have to follow all the strategies and indicators. Choose the one which you find easier to understand, and then develop your trading skills to meet your financial goals accordingly.
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