Parabolic SAR

HOW THE PARABOLIC SAR CAN BE USED AS A TRAILING STOP

The parabolic SAR (stop & reverse) can be used in a similar way as the volatility stop.

One way to use it as a trailing stop is to keep your initial stop in place until price moves sufficiently away from the breakout area (this part is discretionary based on the chart pattern and price movement) and then adjust your profit exit underneath the indicator.

Another way, is to simply just use it as the original stop, which in the example below would of worked just fine. Though, I think you'll find, in most trades it's better to use chart patterns or price structure to set an initial stop.

parabolic SAR indicator on chart of FLIR


Now in this next chart, I'd like to point out a major difference between the parabolic SAR and the volatility stop. Although they might appear similar at times, with certain types of price action, they can act quite differently. The chart below has the indicators set at their default settings. Notice when price makes wide bar movements, the volatility stop does a much better job of keeping up with price (the difference is illustrated with purple, vertical lines).

However, in this particular case, the SAR would've given a slightly better exit. I'm not saying either one is a better trailing stop .......I simply wanted to point out that difference.

Comparison of volatility stop vs Parabolic SAR


As with other exit methods this indicator will offer great trading moments and other times you'll promise yourself you'll never use it again. One of the themes of this website is diversification. Diversify your entries, diversify your exits. Personally I like other methods better than this one, but to each his own.

Here's another example of this indicator as a trailing stop .....when it's working really well.

Example of using the SAR as a Trailing Stop