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Parabolic SAR
Subject: Parabolic SAR
Written
by: Mystifier
August
22nd,1999
One of the keys to successful trading is money management, which is said to be one of the toughest areas to master. One aspect of money management is cutting losses quick and letting profits run. Parabolic SAR is an excellent tool for telling a trader when to cut his losses or let them run.
Interpretation
Parabolic SAR is a system that sets stops for a trending stock. It is based on a very good time tested rule: move your stops only in the direction of the trade and never against it. If you are long, you can raise your stops but never lower them. If you are short you can only lower your stops. The parabolic system protects traders from indecision by imposing an iron discipline on them. It sets a stop the moment you enter a trade and tells you to move it in the direction of the trade. It is extremely useful for fast moving or runaway trends. When prices are flying or tanking, as is the case with many an internet stock, it is difficult to place stops using normal chart patterns or indicators. This is where parabolic SAR shines! It is the best tool for placing stops in those conditions. Below is a chart with the parabolic sar indicator drawn in:
Trading Rules
-The Parabolic system works great in trending markets but leads to whipsaws when a stock or market is trading sideways or is flat.
-If you get whipsawed twice in a row, its a signal that the stock or market is flat and you should stop relying on parabolic but continue to track it on paper.
-Once you get 2 good signals consider it an alert to begin using parabolic again for proper stop placement.
Mystifier
Copyright August 22nd 1999
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