What is the Parabolic Stop and Reverse?
Also known as the Parabolic Indicator, the Parabolic SAR is a technical indicator that traders use to determine entry and exit points. It was developed by the same inventor of the Relative Strength Index and the Average Directional Movement Index.
As the price falls, and generally while using a candlestick chart, a SAR dot will be placed above or below the candlestick body. A dot located above the candlestick body is a signal to sell, while a dot located below the candlestick body is an indication to buy.
How Do I Use the Parabolic SAR to Trade?
The PSAR should be set up on a candlestick chart. Color settings can be changed depending on your charting package, but in general, the ‘buy’ dots will be green and the ‘sell’ dots will be red. Once a dot has been placed that is different from the previous dots, a new trend is indicated and traders will enter the new trend based on whether the dot is buy or sell.
As the dots get closer to the candlesticks, the indication that the trend is slowing or reversing and other indicators can be used to help your decision to stay in the trend or exit early. It is also a good way to set a trailing stop or stop loss order.
What Are The Best Parabolic Sar Settings?
The Parabolic Stop and Reverse settings can be changed to suit aggressive traders or conservative traders. A short term momentum scalper may want to use .06 and .2 as the acceleration factor and the limiter value, respectively. A more conservative, trend trader may want to keep the default settings of .02 and .2 to keep things simple. As always, you should play around with the settings to see what works best for your style.
The Parabolic SAR is a great trader tool for trending markets and to set stop-loss orders. It is best combined with other technical indicators to gauge the strength and direction of the trend.
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