p until now all we have taught you is how to catch the beginning of new trends.
Did we mention it is also important to know where a trend ends?
After all, you need to know when you should leave your Saturday party at your friend’s house.
Parabolic SAR is an indicator that can help us define where a trend might be ending.
It places dots, or points, on a chart where there will be a potential reversal in price movement.
As you can see the pattern of dots reverse from being below the candles during the uptrend to above the candles when the trend changes into a downtrend.
How to Trade Using Parabolic SAR
Parabolic SAR is one of the simplest techniques to use.
When we say simple, we mean that simple:
Dots below the candles = BUY signal.
Dots are above the candles = SELL signal.
Basically, it assumes that the price is either going up or down.
There is one specific trait, though!
You should use it only in markets that are trending, which have long rallies and downturns.
You DON’T want to use this tool in a quiet market where the price movement is trend-less.
How to use Parabolic SAR to exit trades
Its most important role is to help you define whether you should close your trade or not.
Let’s see how this Parabolic SAR works as an exit signal in EUR/USD’s daily chart.
The price of the currency pair EUR/USD started going down in late April, so at this point, it seemed like it would just keep falling until the very bottom.
If you did short this pair, you probably asked yourself when it will stop going low.
In early June, you can notice that there are three dots formed at the bottom of the price.
This is how Parabolic SAR will show you that the downtrend was over and that it was time to exit those shorts.
We hope you wouldn’t be that stubborn to have decided to hold on. Because the EUR/USD reversed its downtrend and went back up at 1.3500.
Ok, that was easy enough, right? Let’s go to the next indicator.