The Parabolic SAR is a technical trading indicator that predicts a stock’s direction. It also creates awareness of when a stock might be reversing direction. SAR stands for stop and reverse. It was developed by Welles Wilder, who also created RSI. He called it the parabolic time/price system. The sar is the actual technical indicator used.
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What Is the Parabolic Sar Indicator?
The parabolic SAR is a popular and good technical trading indicator. Traders use it for price direction. The parabolic SAR indicator aims to give traders the edge by highlighting price direction as a stock moves, enters, and exits.
This indicator follows price and also draws attention to changing prices. You can use the parabolic sar whether going long or short. This technical indicator is a series of dots above or below candlesticks on a chart.
The Trend Is Your Friend
A dot below the price is a bullish sign. Conversely, a dot above the price is seen as a bearish sign. However, since there can be many price break fake-outs, this indicator works best in a strong trend.
If a stock trades sideways, it has more fake buy and sell signals when the price trades in a range.
You’ve probably heard traders say, “The trend is your friend.” It’s true. Trends, whether bullish or bearish, are much easier to trade in. When the market can’t choose a direction, stocks often follow suit.
The parabolic sar follows price, so traders see it as a trend indicator. For example, look for the downtrend to reverse if the price is in a bearish trend but a bullish reversal pattern, such as the morning star pattern.
Once the downtrend has reversed, a new bullish trend is in place. The opposite is also true. Once a bullish trend reverses, the sar trades above the candlesticks. Trend trading is much easier because the price chooses a direction and moves with it.
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Using as a Stop Loss
Did you know the parabolic sar can be used as a trailing stop? The trailing stop or parabolic sar continually rises as long as the bullish uptrend is in place.
This can be a great tool if you’re a day trader and don’t want to place a stop-loss order or you’re a hot key trader. You can still be trading risk management without alerting market makers of your mental stop.
The opposite is true as well. Shorting a stock also uses the parabolic sar stop loss. Once the sar is above price, it trails downward as price heads down.
In other words, it will never decrease in an uptrend or increase in a downtrend. As a result, it continuously protects profits, whether long or short.
Using Other Indicators
It’s important to realize that other technical indicators should be used with the parabolic sar indicator. Using other indicators such as RSI, moving averages, and MACD gives more confirmation.
A bearish trend is much more believable if the SAR is above the price while the price is below the moving average lines. The sell signals are then strong and can be trusted.
Traders can trust the buy signals if the price trades above the moving average lines but below the parabolic sar trading indicator. Using other technical indicators is helpful with confirmation.
Stock trading is emotional. Stocks move because of greed and fear. Technical indicators are tools that smooth out volatility and take the emotion from trading.
Trading on patterns alone could be dangerous, especially if you don’t know what they mean. When candlesticks are coupled with technical indicators, you’re trading safer.
However, these aren’t crystal balls in the future of a stock. Nor does a stock always do what the charts are showing. Nothing in trading is 100%. It’s important to remember that.
Final Thoughts: Parabolic Sar Indicator
You can use the parabolic sar for any trading. However, since this works the best in trends, it can be a great swing trading tool. You can ride the trend up rather than down.
Swing trading is much easier when stocks are in a strong trend because you’re holding at least overnight. However, the typical swing trade lasts 3-6 days up to two weeks.
As a result, watch the parabolic sar indicator and price movement. You can even use it at a long-term trailing stop loss for swing trading. Remember to get confirmation of any changes in trend with other indicators as well as candlesticks and patterns.
