The parabolic SAR is an indicator that is useful under trending conditions. In a non-trending environment, this indicator would give a lot of whip saw activity. In particular, this indicator can be helpful in determining when to exit a trend trade.
The basic idea of the indicator is that the dots will stay above the candles in a downtrend as shown below in the daily chart of the EURGBP. In an uptrend, the dots would be below the candles. As soon as a candle crosses through the Parabolic SAR, the dots would switch positions. Instead of exiting as soon as the dots switch, a better confirmation would be if you get three dots in a row after a switched position. In the example below, there was a couple times where the dots switched from bearish to bullish but only for two dots before returning to the bearish trend. In both of these instances, an exit would not have occurred and the trade would continue as the pair continues in a bearish trend.
For better confirmation, use this indicator with other indicators, such as the exponential moving averages. Together you can have a greater assurance of the trend ending or continuing.
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