Parabolic SAR was developed by J Welles Wilder in 1976 and is a useful trend indicator in technical analysis. While most of indicators show us the beginning of a new trend, parabolic SAR points to the end of a trend.
Parabolic SAR stands for Parabolic Stop and Reverse and parabolic comes from the word parabola. The term “parabolic” is used since the shape of the indicator on a forex chart resembles a parabola. Another name for Parabolic SAR is Reversal System.
When you use parabolic SAR the chart will have little dots placed along the graph. The indication of potential reversals is noticeable when the dots “shift” their position from above the graph to below the graph and vise versa.
Picture provided by ForexYard
Parabolic SAR indicator is very easy to use. It is a great indicator to show the exit points in the forex market that trends strongly. All you have to remember is that when the dots are below the graph you should buy and, on the other side, when the dots are above the graph, you should sell. With this trend indicator you can easily find the right place to put your stops right where the parabolic dots are.
The disadvantage of Parabolic SAR is that it doesn’t work very well with non-trending markets. In non-trending markets Parabolic SAR will give out wrong reversal signals and it might cause you to make early entries or exits.
The parabolic indicator is actually a very useful indicator to adopt in the Forex market, mainly because the Forex market often trends strongly. When market prices soar (or crashes) without a retracement or pullback, it’s quite hard for traders to choose a good stop-loss level when using other indicators. With the parabolic however, you can easily place your stops near to the parabolic “dots”.