The Parabolic Stop and Reverse (SAR) indicator combines price and time components to generate buy and sell signals. The Parabolic SAR is also effective as a tool todetermine where to place stop loss orders.
The chart below of the 100 ounce Gold futures contract is a good illustration showing buy and sell signals generated by the Parabolic Stop and Reverse (SAR) technical indicator:
Parabolic SAR Buy Signal
Buy when the price closes above the upper Parabolic SAR. When the Parabolic SAR changes from being above price to below price, then the stock, futures, or currency trader should "stop" and buy to cover their existing shortsell and "reverse" direction and buy to go long.
Parabolic SAR Sell Signal
A sell signal is generated whent the price closes below the lower Parabolic SAR. At the time that the Parabolic SAR changes from being below price to being above price, the trader should "stop" and sell to exit their existing long trade and "reverse" direction and sell to go short.
One of the best uses of the Parabolic SAR is in determing where to place stop loss orders. How to place stop losses using the Parabolic SAR is discussed on the next page.
