Setting Stop Losses Using the Parabolic SAR
by S. Wade Hansen
Welcome to day four of Stop-Loss Week on PFX. One of the major themes that has been developing in the forum this week regarding stop losses is how proper position sizing can enable you to set wider stop losses than you may have previously been willing to set. Make sure to visit the "Everything You Ever Wanted to Know About Stop Losses" thread in the PFX Forum and join the discussion.
Okay, let's get started with today's topic.
Using Parabolic SAR to Place Stop Losses
The Parabolic SAR is one of the most fascinating tools available for setting stop losses. The Parabolic SAR is plotted as a series of dots either above or below the current price of a currency pair, and these dots indicate where you should set your stop loss.
SAR stands for "stop and reverse," and at its most basic level, this indicator tells you when you need to stop trading with the current trend because it is about to reverse. Some would argue that "stop and reverse" means that if you are long a currency pair, and you hit the Parabolic SAR, you should immediately exit your long trade and enter a short trade, and vice versa, but I don't agree. Neither did the creator of the Parabolic SAR, Welles Wilder. He said that you should first establish which direction the trend was moving and then trade with the trend---only using the Parabolic SAR to establish stop-loss levels for trades going with the trend.
While the Parabolic SAR looks like many other indicators, it does enjoy the following unique characteristics:
- It is one of only a few technical indicators that is plotted in front of the current price
- It shows stop-loss points for both long and short trades
- It protects more and more of your profits as time goes on, thanks to its acceleration factor
- You can adjust its price sensitivity to meet your trading style and preferences
Check out the video on using parabolic SAR at my site here: http://www.pfxglobal.com/forex-video-archives/setting-stop-losses-using-the-parabolic-sar.html
by S. Wade Hansen
Welcome to day four of Stop-Loss Week on PFX. One of the major themes that has been developing in the forum this week regarding stop losses is how proper position sizing can enable you to set wider stop losses than you may have previously been willing to set. Make sure to visit the "Everything You Ever Wanted to Know About Stop Losses" thread in the PFX Forum and join the discussion.
Okay, let's get started with today's topic.
Using Parabolic SAR to Place Stop Losses
The Parabolic SAR is one of the most fascinating tools available for setting stop losses. The Parabolic SAR is plotted as a series of dots either above or below the current price of a currency pair, and these dots indicate where you should set your stop loss.
SAR stands for "stop and reverse," and at its most basic level, this indicator tells you when you need to stop trading with the current trend because it is about to reverse. Some would argue that "stop and reverse" means that if you are long a currency pair, and you hit the Parabolic SAR, you should immediately exit your long trade and enter a short trade, and vice versa, but I don't agree. Neither did the creator of the Parabolic SAR, Welles Wilder. He said that you should first establish which direction the trend was moving and then trade with the trend---only using the Parabolic SAR to establish stop-loss levels for trades going with the trend.
While the Parabolic SAR looks like many other indicators, it does enjoy the following unique characteristics:
- It is one of only a few technical indicators that is plotted in front of the current price
- It shows stop-loss points for both long and short trades
- It protects more and more of your profits as time goes on, thanks to its acceleration factor
- You can adjust its price sensitivity to meet your trading style and preferences
Check out the video on using parabolic SAR at my site here: http://www.pfxglobal.com/forex-video-archives/setting-stop-losses-using-the-parabolic-sar.html
