Parabolic SARHello, Let us talk about 'Parabolic SAR.'
On this chart: We will read about who developed it, how it works, and how it helps us.
Those who read the book called 'New Concepts in Technical Trading Systems' know that Parabolic SAR was developed by J. Welles Wilder Jr. and published in 1978.
Who is J. Welles Wilder?
He is the creator of several technical indicators that are currently the leading indicators in technical analysis software. These indicators include the Average True Range, the RSI, the Average Directional Index, and the Parabolic SAR.
Let us get to Parabolic SAR:
It stands for Parabolic Stop And Reverse.
In technical analysis of the stock market, Welles Wilder designed Parabolic SAR to find potential changes in the pricing of traded goods such as stocks or currency exchanges such as Forex. It is a trend-track indicator (trend or price tracker) and can be used to determine the break-even point or entry or exit points based on prices that occur during a strong trend in a parabolic curve.
In preceding research based on 17 years worth of data, the parabolic SAR showed a 95% success level.
The indicator appears as a set of points located above or below the price bars in the chart. The point below the price is considered as an uptrend. Conversely, a higher price indicates that bears are in control and likely to remain down. When the points rotate, it indicates that a potential change in price direction occurs. For example, if the points are higher than the price when they go lower, it can increase a higher price. As stock prices rise, make the points, first slowly, then rapidly, and accelerating. SAR starts to move faster as the trend progresses, and the points get priced soon.
When the position of the points moves from one side of the asset price to the other, it produces a parabolic indicator of buy or sell signals. For example, a buy signal occurs when points move from the top to below the price, while a sell signal occurs when points move from the bottom to the top of the price.
The formula of calculation:
Uptrend: PSAR = Prior PSAR + Prior AF (Prior EP - Prior PSAR)
Downtrend: PSAR = Prior PSAR - Prior AF (Prior PSAR - Prior EP)
EP: Extreme Point in a trend
AF: Acceleration Factor (with a default value of 0.02)
How accurate is it?
As we said before, the parabolic SAR showed a 95% success level.
The main advantage of this indicator is that during a strong trend, the indicator indicates that traders should maintain their position.
This indicator also shows the output when there is a move against the trend, which indicates a reverse.
The downside is that it does not provide good trading signals in the side market conditions. The indicator constantly moves up and down the price without a clear trend.
Traders should only trade in the dominant trend direction and avoid trading without a trend. Also, using other indicators such as moving average and parabolic SAR can help prevent such losses.
Suppose you are interested in using this great indicator. In that case, you can go on your TradingView chart and the dashboard, click on 'Indicators & Strategies' and search for Parabolic SAR and find the best one suited for you.
Have you ever used this indicator? What do you think the pros and cons are?
Let us know your ideas.
Good luck.
