Although it is important to be able to identify new trends, it is equally important to be able to identify where a trend ends. One indicator that can help us determine where a trend might be ending is the Parabolic SAR (Stop And Reversal). A Parabolic SAR places dots, or points, on a chart that indicates potential reversals in price movement. The nice thing about the Parabolic SAR is that it is really simple to use. We mean REALLY simple. Basically, when the dots are below the candles, it is a BUY signal. When the dots are above the candles, it is a SELL signal.
How to use Parabolic SAR to exit trades
You can also use Parabolic SAR to help you determine whether you should close your trade or not.
Check out how the Parabolic SAR worked as an exit signal in EUR/USD’s daily chart below.
Parabolic SAR exit
When EUR/USD started sliding down in late April, it seemed like it would just keep droppin’ like a rock.
A trader who was able to short this pair has probably wondered how low it’d continue to go.
In early June, three dots formed at the bottom of the price, suggesting that the downtrend was over and that it was time to exit those shorts. If you stubbornly decided to hold on to that trade thinking that EUR/USD would resume its drop, you would’ve probably erased all those winnings since the pair eventually climbed back near 1.3500.