Parabolic SAR

While this is an indicator that works very well in trending markets, as you can see from the below chart simply following the basic, traders should be long when the indicator is below price and be short when the indicator is above price will lead to many whipsaws in range bound markets.

Example of Whipsaws in Range Bound Markets

To combat this problem, it is recommended to establish the strength and direction of the trend first through the use of things such as the ADX, and then using the Parabolic SAR to trade that trend. As mentioned above although the Parabolic SAR is used for both entering and managing positions, it is used far more to set stops once in a position.

Traders need to use this indicator in conjunction with other methods of analysis for confirmation not only on trade entry but also on trade exit.
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Example

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