Although it is important to be able to identify new trends, it is equally important to be able to identify where a trend ends.
After all, what good is a well-timed entry without a well-timed exit?
One indicator that can help us determine where a trend might be ending is the Parabolic SAR (Stop And Reversal).
A Parabolic SAR places dots, or points, on a chart that indicates potential reversals in price movement.
From the image above, you can see that the dots shift from being below the candles during the uptrend to above the candles when the trend reverses into a downtrend.
How to Trade Using Parabolic SAR
The nice thing about the Parabolic SAR is that it is really simple to use. We mean REALLY simple.
Basically, when the dots are below the candles, it is a BUY signal.
When the dots are above the candles, it is a SELL signal.
Yes, we thought so.
This is probably the easiest indicator to interpret because it assumes that the price is either going up or down.
With that said, this tool is best used in markets that are trending, and that have long rallies and downturns.
You DON’T want to use this tool in a choppy market where the price movement is sideways.