The Parabolic Sar is an excellent tool that best serves a trader when the price is in a trend and highly effective when used with other leading indicators in a strategy.
The SAR is used in my trading strategy to help enforce or confirm my final analysis of a confirmed price trend.
The SAR known as a “stop and reverse system” was developed by Welles Wilder also creator or the RSI relative strength index.
The series of dots that form below a price indicate a “bullish” sentiment and a “bearish” one if the dots form above the price. These series of dots can be used as a very effective stop loss point to manage an active trade
The Parabolic SAR signal must never be traded on its own as it can lead to many false signals during periods of consolidation this can lead to entering/exiting positions prematurely.
In the above chart of Wall Street, you will notice from the moving averages that the price is in an uptrend.
Therefore all the “bearish” SAR signals must be ignored and only the “bullish” signals analysed in conjunction with the strategy method.
The first “long” trade would be initiated at the left of the chart at the first yellow ball, as trend and RSI (not shown) are bullish
The second trade would be initiated at the second yellow ball, here we have a overbought situation and lower Bollinger also has been spiked highlighted by the round red circle, though the SAR has signalled a bullish move, we wait until the moving averages stack up in the correct order and then trade immediately.
The third trade would be initiated by the third yellow ball, though the Parabolic SAR has signalled a bullish move well in advance we do not trade it but wait for the moving averages to stack up in the required order. This happens by the third yellow ball where we trade long.
The series of SAR dots can be used as “stop loss” points and the stop loss must be trailed with these dots, this is trade management, in other words locking in your profits as the trade progresses.
However if these SAR dots are too far out from the trailing price, than the risk in the event of price reversal could be too high, the "stop loss" in this case can be trailed using the MA8 - or which ever one presents the least risk to your capital.
No one and no trading method or program exists that can predict for sure where the price will terminate period!
