What is parabolic SAR?
Parabolic SAR is an indicator used to spot potential reversals in price, the SAR stands for stop and reverse. When the parabolic SAR dots are below the candles the trend is seen as bullish and when the dots are above the candles the trend is seen as bearish. Parabolic SAR is best used in trending markets with strong rallies, you may get false signals when using in sideway markets.
How to trade using parabolic SAR
Trading using parabolic SAR is simple, when the dots are change from above the candles to below this shows the downtrend is reversing so you should buy, and when the dots change from below the candles to above, this shows the uptrend is reversing so you should sell. To be less aggressive in the trade you can also wait for a set number of dots to appear to confirm a trend reversal before entering, e.g. wait foe 3 dots to appear before entering the trade, but if the trend does reverse it could cost you a few pips.
Using Parabolic SAR to exit a trade
Parabolic SAR can also be very useful when exiting a trade by using the dots as a trailing stop loss, moving your stop to the last dot or second to last dot depending on your trading plan and risk management. This is helped by the dots staring out close together letting the trend to for the spreading out as the trend progresses and potential reversal is more likely.