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How to Trade With the Parabolic SAR

The Parabolic SAR (PSAR) indicator uses the most recent extreme (highest and lowest) price (EP), along with an acceleration factor (AF), to determine where the indicator dots will appear.

The Parabolic SAR is calculated as follows:
  • Uptrend: PSAR = Prior PSAR + Prior AF (Prior EP - Prior PSAR)
  • Downtrend: PSAR = Prior PSAR - Prior AF (Prior PSAR - Prior EP)
Where:
  • EP = Highest high for an uptrend, and lowest low for a downtrend updated each time a new EP is reached.
  • AF = Default of 0.02, increasing by 0.02 each time a new EP is reached, with a maximum of 0.20.
What this calculation does is create a dot (which can be connected with a line if desired) below rising price action, or above falling price action. The dots/line help highlight the current price direction. The dots are always present, though, which is why the indicator is called a 'stop and reverse'. When the price falls below the rising dots, the dots flip on top of the price bars. When the price rallies through falling dots, the dots flip below the price below.
The basic use of the Parabolic SAR is to buy when the dots move below the price bars (signaling an uptrend) and sell/short-sell when the dots move above the price bars (signaling a downtrend).
This will result in constant trade signals, though, as the trader will always have a position. That can be good if the price is making big swings back and forth—producing a profit on each trade—but when the price is only making small moves in each direction, these constant trade signals can produce many losing trades in a row.
Therefore, it is better to analyze the price action of the day to determine if the trend (if there is one) is up or down. Another indicator such as a moving average or trend-lines can also be used to establish the overall trend direction. If there is a trend, only take trade signals in the direction of the overall trend. For example, if the trend is down (based on your analysis), only take short trade signals—when the dots flip on top of the price bars—and then exit when the dots flip below the price bars.
In this way, the indicator is utilized for its strength: catching trending moves. If you have established an overall trend, then hopefully you won't need to worry about the indicator's weakness: non-profitable trade signals when there isn't a trend.










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17 comments:

  1. This comment has been removed by the author.

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  3. Rizzee CerdeñolaMarch 17, 2019 at 1:05 AM

    I like your blogs about trading. You educate us in a simple way considering trading is a complicated.

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    1. Thank you. Feel free to reach out with any questions.

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  4. I have never heard of parabolic SAR before...your investing tips are topnotch but this article is a little technical.. I will have to read through severally before i can get anything out of it...great share

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  5. Parabolic SAR is a good one for investors. They should just follow your guidance to be able to buy and sell when appropriate.

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  6. Great information here for investors.It good to study and know the Parabolic SAR which is to buy when the dots move below the price bars signaling an uptrend and sell when the dots move above the price bars meaning a downtrend).

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  7. I am unfamiliar with this company or entity so I do not know how to interpret their value. With that said though, at least they are now getting known through this article.

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  8. Your explanation is very clear and easy to follow. Great work sharing this :)

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  9. I hope I will; be able to incorporate this in my trading. There are so many things to learn!

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  10. There's always something new to learn everyday here. I love it and keep them coming!

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  11. This is a relatively new concept but I'm happy to learn about it. Anything to get better in trading.

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  12. Analyzing trends can be tedious but it's the best practice when trading. It's better to analyze than rely on speculation all the time.

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  13. Thanks so much for simplifying and clarifying how parabolic sar works. It would take a lot of time and effort to analyse this on my own.

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  14. Stock trading math. Such a free stock course is very helpful to help unveil these formulas and get things straight.

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  15. I'm more than informed through your free stock course. Looking forwwrad to learning even more. Great information.

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  16. I have been following your investing tips and stock education articles for a while but i have never been this confused. i think i need a recess class after this to get to understand this math. Awesome article though.

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