======= stop will come into play.
Developed By Welles Wilder, the Parabolic SAR (Stop and Reverse) is a price and time system that helps traders to determine when to enter and exit trading positions once trends have been identified. The indicator doesn’t work well in ranges, is mainly used to place stop orders and is considered a valuable indicator by traders. This indicator is plotted directly on to the price chart like bollinger bands. The basic idea is, when the indicator is below price you should be trading long with the trend (bullish) - The indicator now forms your trailing stops. When the Parabolic SAR is above price you should be short (bearish), trailing stops now move down with the indicator.
How it's Used
The Parabolic SAR is a price and trend following indicator and as stated above is mainly used to form stop/loss and trailing stop positions - Don't use it in a Range. The trailing stop continually rises or falls as long as the trend stays in place. Once the trend is broken the <<<<<<< HEAD stop will come into play.
In the McDonald's chart below I've drawn Par SAR with RSI and 50 & 100 day simple moving averages. The Parabolic SAR is represented by the white dots following price. In the middle of the chart you can see a ranging period then a break above the two moving averages in April. Now that the stock is trending (you can use ADX to confirm this) we can use the Par SAR, but we must wait for the right moment. As stated Par SAR is generally used for money management, but it can be used as a trade confirmation and we'll explore both in our example.
McDonadls's - Parabolic SAR and How it's used
Adjusting The Settings
The Par SAR has two variables the Acceleration factor (or step) and the maximum factor (or maximum step). The Step can be set incrementally and dictates the sensitivity of SAR. If it’s set at 0.01 it is less sensitive than being set to 0.03 - 0.03 will create more stops as it is closer to the price action than 0.01.
The maximum step also affects sensitivity, but holds less weight for sensitivity than the step. A lower maximum step reduces sensitivity and allows trends to run. A higher maximum is more sensitive and causes more stops. 0.2 is the default setting. Unfortunately no one setting fits all securities. You may want to play around about the 0.02, 0.2 settings to find out which one fits best before you make a trade.
To Sum Up
Parabolic SAR is primarily a tool of money management, forming stop/loss and trailing stop decisions. Wilder developed it to catch the trend and follow it like a trailing stop. As always Par SAR should always be used in conjunction with other technical indicators to form your trading strategy.
Technical analysis is not an exact science and although these indicators can increase the probability of making the correct trade, many will go against you and large losses can be incurred. Your own trading strategy needs to be formed and hopefully you'll be on your way to achieving this on completion of this course.