In previous articles, we have looked at indicators that focus primarily on detecting the start of new trends. And although it is important to know how to identify new trends, it is just as important to know how to identify where a trend ends. After all, what good would a good entrance be without a good exit? For this it can help us to use the Parabolic SAR indicator.
An indicator that can help us determine the end of a trend is the Parabolic SAR (Stop and reverse). The Parabolic SAR is made up of points on the chart that indicate potential changes in price movement. From the chart above, you can see that the dots are below the candlesticks during the uptrend, and above the candlesticks during the downtrend.
Use of Parabolic SAR
The good thing about Parabolic SAR is that it is really easy to use. Basically, when the dots are below the candles, it is a buy signal, and when the dots are above the candles, it is a sell signal. This is probably the easiest indicator to interpret, because the price is assumed to be going up or down. With that said, this tool is best used in markets that are trending strongly both up and down.
This indicator is NOT suitable for use in a volatile market or when the price movement is sideways or has no clear trend.
The Parabolic SAR is a relatively unknown indicator despite its versatility, its large number of uses and its differentiation from other traditional indicators, although it maintains a certain similarity with moving averages. It belongs to the group of trend following indicatorssince it follows the price as it moves.
The Parabolic SAR can follow the price above or below, the peculiarity that it offers is that when the price touches the indicator, it jumps to the other side of the price (if the Parabolic SAR was below the price it jumps up and vice versa) at a distance predetermined by the indicator. At this time the indicator follows the price again, reducing the distance with each sail until finally it is touched again by the price and the process begins again.