Technical Indicator MEGA Reference Part 43b – Parabolic SAR Part 2 of 2

Parabolic SAR Stop Loss Placement

The Parabolic SAR gives suggestions as to where a trader might place stop loss orders to protect profits or minimize losses.

The chart below of Gold illustrates stop loss placement using the Parabolic SAR indicator:

The Parabolic SAR might be useful to a trader because:

  1. It acts as a trailing stop. Rather than putting in one stop loss below where a trader entered a long position or above where the trader entered a short position, using the Parabolic SAR as a trader’s guide, the stop loss is gradually raised for a long position and lowered in a short position, effectively locking in any profits.
  2. It acts as a time stop. Time stops are used by traders because they enter in buy or sell orders expecting a certain move to occur. If the expected move never occurs and the reason the trader initiated the trade is no longer relavent, then the trader would probably exit their trade. Similarly, the Parabolic SAR incorporates time into its calculation making sure a stock, future, or currency trade is working for the trader, if the trade is not moving in the desired direction, the Parabolic SAR will suggest an exit point.

The Parabolic SAR indicator created by Welles Wilder and chronicled in his classic New Concepts in Technical Trading Systems attempts to give easy to interpret buy and sell signals as well as attempts to create an easy to follow methodology for entering stop loss orders.

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