There are many complimentary forex charts obtainable through brokers or charting services, enabling the foreign exchange trader to compare separate indicators on which to place his trades. One of these indicators is recognized as the Parabolic Stop and Reverse which when used properly can help you with your swing trading decisions.
This indicator was developed by J. Welles Wilder Jr better known as just plain Welles Wilder who is a well known technical analyst. ‘Parabolic’ is a reference to the mathematical shape of the parabola which is like a cone with a rounded tip. It is not necessary to understand the calculations that produce this, since you can see the result clearly in your charting package. This is fortunate because they are too complex to do easily by hand.
SAR stands for Stop And Reversal. As you might expect, this relates to the moment when a price stops moving in one direction and reverses to move the other way. Clearly it is very useful to know when this is about to happen so that you can close out successful trades at the peak of their profits. This is what the Parabolic Stop and Reverse on free forex charts aims to tell you.
So you would not normally use it to signal the beginning of a trend. You would consult other indicators for the best moment to open your trade, and then use the Parabolic SAR to indicate the best moment to close it.
The indicator appears as a succession of dots higher than or lower than the chart of current prices. Usually it is used in conjunction with a candlestick chart, so you will see the dots below the candles during an upward trend and above the candles during a downward trend.
If you have a trade open and are following the trend into profit then you will be watching for the best time to close it cosequently you will be waiting for the dots to cross over the line of candles. This is the indication where the trend is starting to reverse and you ought to exit the trade quickly.
Alternatively you can take advantage of the Parabolic Stop and Reverse to place stops, especially if you employ the trailing stop. You simply set your stop at the point indicated by the current dot. When the trend is strong, this will be a long way from the current price so your stop will not easily be triggered. When the trend slows, the dots move toward the current price, tightening up the gap. When a reversal is indicated the stop will be triggered by just a small movement. When the Parabolic Stop and Reverse is accurate this pattern can bring you greater profits than simply setting your exit point at a set distance from the current price.
This is not a tool used by scalpers. It is not so useful for short term fluctuations in a choppy market. The indicator is most reliable over real trends lasting several hours or days. If your trading system is structured around this type of trend trading, you will discover the Parabolic SAR a valuable tool to get the most out of your profits from using free forex charts.