The Parabolic Stop and Reverse (SAR) indicator combines price and time components in an attempt to generate potential buy and sell signals. The Parabolic SAR advertises itself as an effective tool to determine where to place stop loss orders.
The chart below of the 100 ounce Gold futures contract is a good illustration showing possible buy and sell signals generated by the Parabolic Stop and Reverse (SAR) technical indicator:
A trader might buy when the price closes above the upper Parabolic SAR. When the Parabolic SAR changes from being above price to below price, then the trader might “stop" and buy to cover their existing shortsell and “reverse" direction and buy to go long.
A sell signal is potentially generated when 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 might “stop" and sell to exit their existing long trade and “reverse" direction and sell to go short.
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