In this article, we will be taking a look at the parabolic SAR indicator, which is used to show traders the direction a given asset is moving in. We will take a look at what role this indicator serves, the advantages and disadvantages that come with it, and how to maximize its use. So, without further ado, let’s get started!
What Is the Parabolic SAR Indicator?
The parabolic SAR was developed by J. Welles Wilder Jr., the man behind the relative strength index. This is an indicator used to study the price direction of assets and see when and how the price direction is changing. SAR stands for ‘stop and reversal,’ which is very fitting once you understand how it works and how to read it.
When seen on a chart, the indicator looks like a set of dots, each of which has its candlestick attached to it. During an uptrend, the dots are located below the bar, and during a downtrend, the bars are located below the dots. By learning how to use the Parabolic SAR indicator, you can see whether the market is being bullish or bearish – and uptrend and downtrend, respectively.
This indicator is also widely used as a stop loss or trailing stop, thereby justifying the name. When the price crosses a certain threshold, say the current dot of the indicator, the trader will receive a notification showing them whether the trend has turned up or down. Using this information, they can then decide whether to stop or keep going.
The Pros and Cons of the Parabolic SAR Indicator
The SAR indicator was designed to maximize profits for the trader who used it, and it does its job very well. It allows you to calculate both the beginning and the end of a new trend while also never guessing the peak of the movement. Instead, the indicator moves with the trend. Slowly at first, taking its time to catch up, but then sticks right with it. This allows traders to maximize profits by slowly shifting the take profit level by studying the trends and how they swing.
However, while it enables you to make a lot of profits while the going is good, it also can lead you on the way to a lot of losses depending on the market. If it is a rather volatile day or if the market is moving laterally instead of vertically, then it is best to expect some losses and smaller profits. It is best to avoid using the PSAR during sideways movements.
If you have been in the game for some time, you should know not to rely on a single tool to meet all your needs. It is much more secure to use multiple. Using indicators that complement each other is the winning strategy to aim for, and that is what we are going to discuss in this section. Use other indicators in conjunction with it to make up for its shortcomings. ADX, moving average, and stochastic are all viable in this regard.
There are also guidelines you can follow that are not particularly complicated:
The SAR indicates below the current market price point to an uptrend;
The SAR indicates above the market price point to a downtrend;
It is going in a position when the price hits the SAR indicator, the purchase if the price goes above the SAR indicator, and sell if it goes below.
Stop and reverse when your position price crosses the SAR indicator again.
However, using the SAR generates a lot more trades than usual. Using a moving average indicator can usually cover an entire move in one trade instead of tracking every micro change. The strategy with the SAR is to make profits on an asset that is trending favourably and then get out of that trade while you still have profits.
The parabolic SAR indicator was developed for a specific purpose, and it does this job very well. There is hardly anything better to show you the direction an asset is moving in and place stop-loss alarms to ensure you don’t lose too much. However, it works best in a stable market and needs some backup to be of the utmost use to anyone.
In a volatile market, the SAR is prone to providing false signals and losing trades. Our tip would be to only trade in the direction of the dominant trend. Make your profits and then end the trade. That is the best way to use the parabolic SAR indicator – exactly what it was meant to do. However, trading is fraught with volatility, so be sure to protect yourself at all costs and stay safe.