What is parabolic SAR?
The SAR (stop and reverse) technical indicator is a useful tool for traders who want to identify potential trend reversals in the market. This indicator is primarily used for short-term trading and can help investors to place stop-loss orders in order to minimize potential losses.
To use the SAR indicator, a trader needs to plot a series of dots on a price chart that indicate the direction of the trend. When the price is rising, the dots will appear below the price, and when the price is falling, the dots will appear above the price.
Once the dots have been plotted, a trader can use them to identify potential trend reversals. For example, if the dots have been appearing below the price and suddenly start appearing above the price, this could indicate that the trend is reversing and that it may be time to sell.
How to use parabolic SAR in trading?
The parabolic indicator generates buy or sell signals when the position of the dots moves from one side of the stock price to the other. For example, a buy signal occurs when the dots move from above the price to below the price, while a sell signal occurs when the dots move from below the price to above the price.
Here's a scenario to demonstrate how the SAR indicator can be used in practice:
Let's say that you are a trader who is interested in buying shares of AAPL stock. You have been monitoring the price chart and have noticed that the stock has been in an uptrend for the past few weeks. However, you are concerned that the trend may be coming to an end and that the stock may soon begin to fall.
To confirm your suspicions, you decide to use the SAR indicator. You plot the dots on the price chart and notice that they have been appearing below the price, indicating that the trend is still up. However, you also notice that the dots are starting to move closer to the price, which could be a warning sign that the trend is about to reverse.
As a result, you decide to place a stop-loss order below the most recent low in the stock's price. This way, if the trend does reverse and the stock starts to fall, you will be protected from further losses.
In conclusion, the SAR technical indicator can be a useful tool for traders who are looking to identify potential trend reversals in the market. By plotting the dots on a price chart, investors can make more informed decisions about when to buy or sell a particular security. However, it is important to remember that no technical indicator is foolproof, and traders should always use multiple indicators and analysis methods before making any investment decisions.