Applying Effectively Parabolic SAR for Your Trading

A technical indicator that is considered a powerful support tool, widely used in technical analysis that every successful investor needs to know is the Parabolic SAR indicator. Let’s explore step by step how to apply them to your analysis most effectively!

What Is the Parabolic SAR Indicator?

The Parabolic SAR (short for Stop And Reverse) indicator is a useful tool to help investors predict the market. Developed by expert Welles Wilder, the tool is widely used in trading to determine market trends and find potential entry points.

How does Parabolic SAR work?

On the price chart, you will see Parabolic SAR displayed as small dots. These dots will move with the price and tell you whether the market is going up or down.

When the dots are below the price, it shows that the market is in an uptrend.
When the dots are above the price, it shows that the market is in a downtrend.

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Why is it called “Stop and Reverse”?

Stop: When the price touches these dots, it can be a signal that the current trend may be weakening and you should consider exiting the trade.
Reverse: If the dots “flip” from top to bottom or vice versa, it can be a signal that the trend is reversing.

The Formula for the Parabolic SAR Indicator

You know that Parabolic SAR is displayed on the chart as dots that move with the price. So how are these dots calculated? Let’s explore the formula behind it!

Two formulas for two trends

Depending on whether the market is up or down, Parabolic SAR is calculated as follows:

When the market is up: New SAR = Old SAR + Acceleration Factor x (Old High – Old SAR)
When the market is down: New SAR = Old SAR – Acceleration Factor x (Old High – Old High)

Formula decoding

SAR is the value of the Parabolic SAR dot at a certain point in time.

Acceleration Factor: This is a small number, usually starting from 0.02 and increasing over time. It determines the speed at which the SAR dots move.

High: Is the highest price in an uptrend or the lowest price in a downtrend.

How to Use the Parabolic SAR Indicator

Here are some ways you can make the most of these dynamic indicators in the market:

Recognize trends quickly: Just by looking at the position of the SAR dots, you can easily determine whether the market is going up or down. When the dots are below the price, it is a signal that the market is in an uptrend. Conversely, when the dots are above the price, it shows that the market is going down.

Reversal prediction: Parabolic SAR helps you spot early signs of a trend reversal. When the SAR dots “jump” from top to bottom or vice versa, it can be a warning signal that the current trend may be about to end.

Place a safe stop loss: Instead of placing a stop loss arbitrarily, you can rely on Parabolic SAR to determine a reasonable stop loss level. In an uptrend, you can place a stop loss order just below the SAR dots to limit your risk if the market suddenly reverses.

Combined with other indicators: Parabolic SAR works best when combined with other technical indicators such as MACD, RSI, … This helps you confirm trading signals and minimize risks.

When the SAR dots are below the price: Uptrend.
When the SAR dots are above the price: Downtrend.

Buy when the price breaks above the Parabolic SAR dot.
Sell when the price falls below the Parabolic SAR dot.

Determine the stop loss: Use the SAR dot itself as a trailing stop loss.

Advantages and disadvantages of Parabolic SAR indicator

Like other technical support tools, Parabolic SAR also has its own advantages and disadvantages:

Advantages of Parabolic SAR indicator

Quick trend identification: Parabolic SAR helps us easily identify whether the market is going up or down.
Reversal point prediction: This indicator can warn us of sudden changes in the market.
Effective stop loss order placement: Parabolic SAR helps us place stop loss orders appropriately, helping to protect capital when the market goes against our predictions.

Disadvantages of Parabolic SAR indicator

When prices fluctuate in a narrow range such as in a sideways market, Parabolic SAR often gives false signals, leading to incorrect trading decisions.
Parabolic SAR should be used in combination with other technical indicators to confirm signals and minimize risks.

The Parabolic SAR vs Moving Average (MA)

Both Parabolic SAR and MA are used to determine the price trend of the market, but the way they represent it is completely different:

MA (moving average) shows us an overview of the market. MA is often more effective in long-term conditions. However, it reacts quite slowly to sudden changes in the market.
Parabolic SAR: Parabolic SAR is often more sensitive than MA in catching up with sudden changes in the market. It focuses on following the price through the acceleration coefficient, showing us the extreme highs and lows of the price from which we can make timely reversal decisions.

Trading strategy with Parabolic SAR indicator

Parabolic SAR is a useful tool and should be combined with many other indicators to maximize its combat ability in the market. Here are some popular strategies that are often used:

Parabolic SAR and Moving Average (MA):

MA helps determine the general trend of the market, while Parabolic SAR identifies potential reversal points. When combining both, we can confirm trading signals more accurately.

When the short-term MA line crosses below the long-term MA line and Parabolic SAR is above the price, it is a sell signal. Conversely, when the short-term MA line crosses above the long-term MA line and Parabolic SAR is below the price, it is a buy signal.

Parabolic SAR and RSI

RSI measures the momentum of the market, helping us identify overbought and oversold areas. When combined with Parabolic SAR, we can identify safer entry points.

When RSI is in overbought territory and Parabolic SAR gives a sell signal, it is a strong sell signal. Similarly, when RSI is in oversold territory and Parabolic SAR gives a buy signal, it is a strong buy signal.

Parabolic SAR and MACD

MACD measures the relationship between two moving averages, providing information about momentum and trend changes. When combined with Parabolic SAR, we can confirm trading signals more accurately.

When MACD crosses below the signal line and Parabolic SAR gives a sell signal, it is a strong sell signal. Conversely, when MACD crosses above the signal line and Parabolic SAR gives a buy signal, it is a strong buy signal.

Conclusion

In conclusion, through the article I’m sure you have clearly understood how the Parabolic SAR indicator works as well as the memorable advantages and disadvantages. Apply that knowledge in combination with the strategies I shared above to make wise investment decisions. Good luck!

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