Parabolic SAR: what's it actually good for?
The Parabolic SAR trails price with accelerating dots that flip sides on reversals. It's a trailing-stop tool at heart, and as an entry signal it whipsaws badly in ranges.
How do you use it?
- the role SAR plays in your plan
- the settings that fit your pairs
- the whipsaw that convinced you of its limits
The ATR guide covers the more robust trailing alternative.
Background: Average true range (ATR): measuring volatility and setting stops
ATR shows how far a pair typically moves in a period. Here is how true range is calculated, and how traders use ATR to place stops and size positions.
How is ATR calculated?
True range for each period is the largest of high minus low, high minus the previous close, and low minus the previous close, ignoring signs. ATR averages true range, typically over 14 periods with Wilder's smoothing.
What ATR multiple should I use for a stop-loss?
Many traders use 1.5 to 2 times ATR, but there is no correct number. Wider stops are hit less often and need a smaller position to keep the same amount of money at risk.
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