This is a guest post by Ahmad Hassam
In this article, we will discuss how to use the Parabolic SAR indicator for entry and exit in actual trading. When the dots of the Parabolic SAR are located below the price, it means the trend is up and the price momentum is also in an upward direction and will stay like that till the price action hits Parabolic SAR. This is also a signal for a long trade.
When the price action is below the dots of the Parabolic SAR, it means that the trend is down and the price momentum is also in a downward direction and will stay like that till price action hits the Parabolic SAR. This is also a signal for a short trade. The dots will move down as a trailing stop.
The advantages of using Parabolic SAR indicator is that when a trade is entered the initial distance between the Parabolic SAR and price and the slow movement of the dots gives enough space for the price action to move favorably. Once the trend gets well established, the dots accelerate and the trailing stop gets very close to the price action locking in the profit.
Parabolic SAR is always used in conjunction with other indicators. However keep this in mind it works in a trending market. If you use it in a sideways market, it will generate many signals and cause whipsaw. When the price hits the parabolic arc the indicator reverses to the other side of price to form a new series of dots on the other side of price action, it is taken as an entry signal. Before entering into a trade, make sure you are trading in the direction of the trend.
For example, you can use 10 Period SMA and 50 Period SMA to confirm the direction of the trend. When 10 Period SMA is above 50 Period SMA, it is a signal that the trend is up. So when the Parabolic SAR changes direction from above the price to below the price, you will go long. In the same manner, when 10 Period SMA is below the 50 Period SMA, the trend is down and you will go short when the Parabolic SAR changes direction from below the price to above. Parabolic SAR is also often used as a trailing stop.
Deciding when to exit is often difficult for a trader. Letting Parabolic SAR do that for you makes trading much easier. A Simple System based on using Parabolic SAR for entry and exit can be a 50 Period SMA. When price action crosses above 50 Period SMA, it means the trend is up. When Parabolic SAR is above the price action, it means the price is retracing. As soon the Parabolic SAR reverses direction and goes below the price action, enter into a long trade. When Parabolic SAR changes from below to above the price, exit the trade.
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