Parabolic SAR (Stop And Reversal) is a useful tool to use to help identify ends of trends rather than the beginnings. While the actual calculation of the Parabolic SAR is not necessary to learn for a “Simple” course, know that unlike many of the other indicators Parabolic SAR only uses the current data. Only information from today is used to calculate tomorrows Parabolic SAR. It relies on the premise that eventually there is a decay in the strength of a trend and so unless there are new reasons for the price to continue in its current trend it should be liquidated .
The reading of a Parabolic SAR is very simple. It is generated as dots either above or below the market price. If the dots are below the price, then that is a buy signal; if they are above the market price then that is inferred as a sell signal.
The 4hour EUR USD chart of the last 30 days (July 2011) shows how well it works in a trending market. The parabolic SAR dots are also often used as a trailing stop.
The only concern about using the Parabolic SAR is knowing when to use it. Parabolic SAR works well in a trending market but in a market that is trading in a range it gives false signals and provides “whipsaws” i.e. indicates one way then suddenly moves dramatically in the opposite direction, often leading to losses.
In your MT4 demo or live account, Parabolic Sar can be added to your chart by clicking Insert > Indicators > Trend > Parabolic SAR. It can also be added by double clicking parabolic SAR in the navigation window on the left. Like many other indicators in MT4 Parabolic SAR is calculated based on periods which are defined in the chart view currently open i.e. the 30 minute chart will show different dots to the 4hr chart etc.
