Basically, parabolic SAR is used to indicate trend on a certain pair in forex trading. But I never use it for that purpose. Since this indicator is not that accurate in giving me buy or sell signals with great result. However, it is very useful to help us indicating when the right time to exit market is.
'SAR' stands for Stop and Reverse. The indicator was developed by Welles Wilder, creator of RSI and ADX. Parabolic SAR is more popular for setting exit targets than for establishing direction or trend. While others recommend to establish the trend first, and then trading with Parabolic SAR in the direction of the trend. If the trend is up, buy when the indicator moves below the price. If the trend is down, sell when the indicator moves above the price.
I used ADX to determine when is the right time to enter the market and Parabolic SAR to determine when is the right time to exit.
If you have sell position, when parabolic SAR indicator is below market price then it is the right time to exit from market. And vice versa, if you have buy position, when parabolic SAR indicator is above market price then it is the right time to exit market.
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Richie is a forex trader and forex technical analyst.
You may read my articles at: Forex Library
and my daily technical analysis at my brother's blog: Brian Signal