A trend change is typically not used to initiate or remove trading positions as much as to signal a possible modification in the ‘trading bias.’
To put it another way, it’s like throwing a stone into a placid pond. It causes a ripple. Sometimes it’s a large stone and it causes a large ripple or multiple ripples. Sometimes, it’s a small stone, yielding a ripple so minor that it is barely noticeable.
Hence, the longer the timeframe observed for a trend change, the more prominence it receives.
Conversely, the shorter the time frame, the less likely that a bias would change.
Parabolic SAR is one such indicator, which helps us assess trend (bias) changes.
Rule 1: When the trend is upward, a dot is placed below. With every rise in prices subsequently, the P-SAR (dot) rises higher, just like a trailing stop loss for a long position.
Rule 2: When the trend is downward, a dot is placed above. With every subsequent fall in prices, the P-SAR falls lower, just like a trailing stop loss for a short position.
Fig 1: A P-SAR plotted on monthly charts of Nifty gives a decent understanding of the current trend, and what level one needs to watch for a possible trend reversal.
Why is this indicator important from a medium-term perspective?
This is a significant indicator to look at because it can absorb the correction at the end of 2016 (on the back of demonetization), and it failed to confirm a breakout of the trend. And what happened to the Nifty50 after that is now history.