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Thursday, June 15, 2017

How to Use Parabolic SAR

Parabolic SAR was developed by Welles Wilder. It refers to price and time-based trading system. SAR stands for Stop and Reverse. And just as the name, it indicates where the market trend has stopped at some point and indicates a reversal. 

This indicator works the best combined with others in order to determine when to exit from your current position from the market.

Refer to the following picture, once the indicator changed side that means market trend has changed as well. 

SAR is actually a trend following indicator. It will keep on rising during bullish trend and will never switch side as long as bullish trend remains. 

You can increase sensitivity of SAR by decreasing its step value. Recommended value is actually 0.02. But some of the traders prefer to have it more sensitive by putting value of 0.01. And we normally leave maximum value up to 0.2.

Sometimes, Parabolic SAR doesn't give you fast enough signal for you to enter the market, that is why it is recommended to use this indicator in combination with other indicators to determine when to enter the market and use Parabolic SAR to determine when to exit and where to put your trailing stop in order to save your profit in long-term trading.

How to implement trailing stop strategy using Parabolic SAR will be discussed in another article.