The Parabolic SAR is an indicator that is used by traders to determine the direction of a pair's momentum, and more importantly when the momentum has a larger than usual probability of changing directions. Sometimes when traders us the Parabolic SAR, they will refer to it as a "stop and reversal system". The Parabolic SAR indicator was developed by J. Welles Wilder, who also created the RSI, or Relative Strength Indicator, one of the most popular indicators for technicians to use in the various financial markets around the world. The Parabolic SAR is shown as a series of dots placed either above or below price on a chart.

One thing to keep in mind when using the Parabolic SAR is that the positioning of the dots is used by the trader to produce trade signals depending on where the dot is placed. A dot that is plotted below the price of the market is a bullish signal, meaning to expect the momentum to bullish for the time being. Conversely, a dot placed above the price shows that selling pressure is likely to either build, or continue if it is already in control.

An entry point to buy occurs when the most recent high on the chart has been broken. This is when the SAR dot is placed at the most recent low. As the price continues to rise, the dots will rise as well. They will first move upwards slowly, but then pick up speed with the trend. The fact that this indicator actually accelerates allows the trader to watch the trend develop, and then firmly establish itself. The SAR dots will then move a little quicker as the trend becomes confirmed and the dots will soon catch up to the price of the chart itself. One thing that should be kept in mind: This is a trend-following indicator, and therefore can get chopped up in sideways markets as it needs a trend to determine the placement of the dots.

Published on 17th of June 2011
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