The Parabolic/SAR indicator was developed by J. Welles Wilder in 1976. It is often used to select trailing price stops and is commonly referred to as SAR (Stop And Reversal).
This indicator aims to signal the reversing of a trend, thus providing traders with a good tool for choosing trade exit points. The unique feature about the parabolic indicator is that it takes into account both the factors of time and changing prices. Most traders unfortunately focus mainly on prices and ignore the effects of the passage of time.
What Does The Parabolic/SAR indicator look like?
Unlike most other indicators, the parabolic indicator is not a line on the trading chart. It is actually a series of dots that are located either above or below the chart candlesticks or bars. When prices are moving up, the parabolic dots are located below the candlesticks. When prices are moving down, they are located above the candlesticks.
How Effective Is The Parabolic/SAR Indicator?
Although this indicator is pretty effective in identifying trend reversals, it works poorly in ranging (i.e. non-trending) markets. In ranging markets, you will find that this indicator will often give false reversal signals, and may cause you to prematurely enter or exit into trades.
The parabolic indicator is actually a very useful indicator to adopt in the Forex markets, mainly because the Forex market often trends strongly. When market prices soar (or crashes) without a retracement or pullback, it’s quite hard for traders to choose a good stop-loss level when using other indicators. With the parabolic however, you can easily place your stops near to the parabolic “dots”.
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