Home Investment Parabolic stop and reverse indicator tool and exiting a trend

Parabolic stop and reverse indicator tool and exiting a trend

by John Dillans

It must be evident that traders always look for the beginning of a trend because we can mostly find money and profit in there. Looking for the beginning of a trend has been one of the most critical priorities of every trader. Here is a tip: the ending of a trend is just as important as the beginning of a trend. Why? It is simple. A good and perfectly time entry is not too relevant if the exit is not as good and perfect.

Is there such a thing?

Indeed, there are plenty of tools and indicators to help a trader look for the beginning of a trend. If you find a tool that spots the end of the trend, then the parabolic SAR might be of great help. Parabolic SAR is short for parabolic stop and reverse.

What is a parabolic stop and reverse?

If we look at a chart, we will see that parabolic SAR puts dots or points. These dots or points tells us that there is a possible reverse in the price movement. If you observe some charts, you will see that the dots may shift above the candles as the trend reverses in a downtrend from its position below the candles as the uptrend happens.

How does one use parabolic stop and reverse in a trade?

The parabolic stop and reverse tool is plain and simple. It is nothing too complex. Here is how it goes:

It is a signal to buy if the dots are positioned below the candles. On the other hand, it is a signal to sell if the dots are placed above the candles. Plain and simple, right? Out of all the indicators, we can consider parabolic stop and reverse as one of the easiest, if not the easiest, to understand and interpret. It will assume that the price might either go up or down.

So, what can we say? The best time to use the parabolic SAR when there are trends in the markets with long rallies and downturns. Avoid using this indicator tool when the price movement in a choppy market is sideways.

Applying the parabolic stop and reverse in trade exits

A while ago, we mentioned that the closing of a trend is also as important as spotting the beginning of a trend. Now, parabolic stop and reverse help traders know and weigh whether they have to close a trade or not yet.

For instance, we have a EUR/USD daily chart. The EUR/USD currency pair started to decline in January, and it looks like it will continue to do so. Now, you already went short on your EUR? USD currency pair, but you are wondering if the price would continue to decline. If it does, how low is the lowest decline? After a few months, you saw three dots under the bottom of the price. These dots mean that the downtrend ended, and it is a signal to exit the short positions. If you held on to your EUR/USD pair hoping that it will decline again, then you would already lose all your profits once the pair increases.

Final thoughts

If we have an indicator tool that is this easy, then we should maximize its use and do not take it for granted since a trend’s exit and knowing when to exit are essential!

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