The Parabolic SAR (PSAR) is an indicator favored by technical traders that captures reversal signals.
The Parabolic SAR (Stop and Reverse) was developed by J. Wells Wilder. Wilder was a mechanical engineer best known for his technical analysis developments. He has also developed the DMI (Directional Movement Index), the RSI (Relative Strength Index), and other indicators dear to technical analysts today.
How to Use It
In simple terms, if the pair is trading under the PSAR you should sell. If the pair is trading above the PSAR you should buy.
There are many ways to trade this indicator. You can trade it with additional indicators or on multiple/different time frames. Nathan Tucci wrote an article in May 2012 that illustrates how the PSAR can be incorporated into a trading strategy. See that article by clicking here and his Forex Trading System article by clicking here.
You can also simply trade the Parabolic SAR on longer term, trending pairs. For example, let me show you this EUR/USD daily chart:
EUR/USD daily chart
If you would have shorted the EUR against the Dollar at the reversal around the 1.32 region you would have had around a 500 pip trade.
It never hurts to test integrating an indicator into your strategy or to try it on a demo account. Go ahead and test it out!
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How to Trade the Parabolic SAR
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Using Murray Lines
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Technical Indicators
Using Simple Moving Averages
Ichimoku Kinko Hyo Indicator
Average True Range (ATR)
Learn more about Trading Forex on our Tutorials page.