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Parabolic SAR Indicator

Parabolic SAR Indicator use a stop and reverse method called SAR to identify exit and entry points. The trader will refer to indicators as parabolic stop and reverse like PSAR. The PSAR appears on a chart as a series of dots above /below an asset's price. They depend on the direction of the moving prices. A reversal in the indicator does not need a mean reversal in the price. A PSAR reversal means that the price and indicator have crossed. Parabolic SAR Indicator generate buy/sell signal when the position of dot that moves from one side of the asset price to other. The traders use the PSAR dots to set orders.

The reversal signal will be generated at some point if the price doesn’t drop. The PSAR only needs to catch to price and generate a reversal signal. They will generate a new signal as it moves to the opposite side of an asset's price. This indicator works effectively in trending markets where a large price move allows traders to capture significant gains. The small dot is placed below the price when the trend of the asset is upward. The dot is placed above the price when the trend is downward. At first, the rise is first and the pace accelerates with the trend, before catching up with asset price. The parabolic SAR tends to whipsaw back and forth and generates false signals. Traders may use candlestick patterns for better results. The indicator also used to set a stop-loss order. The achieved by moving the stop loss to match the level of the SAR indicator.

Pros and Cons of the Parabolic SAR

The advantage of the indicator is that the strong trend indicator will highlight a strong trend by keeping in trending move. The indicator gives an exit when there is a move against the trend as in reversal. This will end up with a good exit as a price reversal. The disadvantage of the indicator is that it provides a little analytical insight during sideways market conditions. The indicator will flip-flop above and below the price during a clear trend.

Limitation

The parabolic SAR is on and generates a signal. A reversal signal is generated when the SAR catch a price due to the acceleration factor. This indicator is mechanical as it gives new signals to get long/short. It is up to the trader to determine which trades to allow.

Conclusion

The use of using of a Parabolic SAR is used to determine the direction of the price. They will trend to produce results in a trending environment. They are used when the price start move in sideways.

Difference between Moving average and Parabolic SAR

Both indicators are called a track price. They will help show the trend but by using different formulas. A moving average takes the average price over a selected number of periods and plots on the chart. The PSAR looks at highs and low also applies an acceleration factor.