Technical Analysis 101: The Parabolic SAR

There are hundreds – if not thousands -- of ways to study a chart.

Look through Steve B. Achelis’ Technical Analysis from A to Z if you have a chance.  There are nearly 330 pages worth of examples, including the Parabolic SAR, or the Parabolic Stop and Reverse, which can help indicate momentum.  It can also be used to indicate a higher probability of pivoting and switching direction.

One important thing to keep in mind with this indicator is the dots in relation to the price of the stock.  A dot placed below the price of the stock is considered a bullish sign.  Traders can expect for momentum to pick up at that point.  A dot placed above the price of the stock is considered bearish. Traders can expect for momentum to reverse lower.

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In short, a trader should sell a long position when the price of a stock falls below the SAR, and close a short position when the stock price moves above the SAR.  As you can see in this chart of Facebook (FB), at times, when the stock closes above SAR, it continues to move higher, which would damage a short position.

Or, if the stock closes below the SAR as it did in November 2016, it can indicate it’s time to jump out of the trade, or risk damage to the long position.  As you can also see, it’s not a completely reliable indicator.  Because of that, it should never be used as a standalone indication of things to come.  Instead, it should be used to confirm other indicators, such as Bollinger Bands, MACD, RSI, Williams’ %R, and Money Flow.

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