The parabolic SAR is one of the most fascinating tools available for setting stop-losses. The parabolic SAR is plotted as a series of dots either above or below the current price of a currency pair, and these dots indicate where you should set your stop-loss.
SAR stands for "stop and reverse," and at its most basic level, this indicator tells you when you need to stop trading with the current trend because it is about to reverse. Some would argue that "stop and reverse" means that if you are long a currency pair, and you hit the parabolic SAR, you should immediately exit your long trade and enter a short trade, and vice versa, but I don't agree. Neither did the creator of the parabolic SAR, Welles Wilder. He said that you should first establish which direction the trend was moving, and then trade with the trend-only using the parabolic SAR to establish stop-loss levels for trades going with the trend.
While the parabolic SAR looks like many other indicators, it does enjoy the following unique characteristics:
- It is one of only a few technical indicators that is plotted in front of the current price
- It shows stop-loss points for both long and short trades
- It protects more and more of your profits as time goes on, thanks to its acceleration factor
- You can adjust its price sensitivity to meet your trading style and preferences
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By Wade Hansen of PFXGlobal.com
