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Thursday, November 7, 2013

Parabolic SAR Indicator in Forex

SAR stands for stop and reverse and it is a trend following indicator, designed to identify the turning point in price action.

SAR stands for stop and reverse and it is used to identify the turning point, or reversal, of a trend. It is shown on a chart by a series of small dots. If the dots are above the price, then the trend is likely to be down; if the dots are below the price, the trend is likely to be up.
The parabolic SAR is shown on the charts as a series of small ‘dots’ that are placed either above or below the price. When the price is trending to the upside, the dots are below the price action and when the price is trending to the downside, the dots are above the price action.

It trails the price movement until the price move has finished and begins to reverse.

As the price move comes to an end, the parabolic SAR moves steadily closer to the price until the price ends up touching the dots - the SAR then begins to form on the other side of the price, indicating that the price is changing direction.

The Parabolic SAR can be used effectively for:

Determining the trend
Entry and exiting trades
Trailing stops

The chart above demonstrates the parabolic SAR indicating and then tracking an uptrend.

 - SAR indicating an uptrend
 - SAR tracking the uptrend

In the illustration above, notice how the SAR appears below the price as price moves upwards. When the price move is finished, the price touches the SAR, signalling a possible change in the trend to the downside.

 - SAR touches the end of the uptrend, indicating a reversal
 - SAR tracking the downtrend

In the example above, the SAR appears above the price, signalling a downtrend. The SAR trails the price down until the price movement is finished and when the price touches the SAR, it changes, signalling the end of the current downtrend and a possible reversal to the upside.

Traders can use the SAR to identify the direction of the trend.

The SAR can also be used for trailing stop losses, moving the stop loss just behind each new SAR that forms, until the price eventually reverses and stops them out in profit.

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