Parabolic SAR technical indicator has one major drawback. It is not noticeable enough on a chart containing other indicators. Therefore, its signals concerning a trend reversal may be missed.
To improve this disadvantage large colored dots that appear during each trend reversal have been added. The indicator itself is made in two colors.
Author: Nikolay Kositsin
Indicators: Parabolic SAR
newdigital, 2013.08.08 14:02
Introduction To The Parabolic SAR
first entry point on the buy side occurs when the most recent high
price of an issue has been broken; it is at this time that the SAR is
placed at the most recent low price. As the price of the stock rises,
the dots will rise as well, first slowly and then picking up speed and
accelerating with the trend. This accelerating system allows the
investor to watch the trend develop and establish itself. The SAR starts
to move a little faster as the trend develops and the dots soon catch
up to the price action of the issue. As you can see in Figure 1, the
indicator works extremely well when a stock is trending, but it can lead
to many false signals when the price moves sideways or is trading in a
Parabolic SAR and the Short SaleThe parabolic SAR
is extremely valuable because it is one of the easiest methods available
for strategically setting the position of a stop-loss order.
As you become more acquainted with technical indicators, you'll find
that the parabolic SAR has built up quite the positive reputation for
its role in helping many traders lock-in paper profits that have been
realized in a trending environment. You can also see that professional
traders who short the market will use this indicator to help determine the time to cover their short positions.It
is important to note that this indicator is extremely mechanical and
will always assume that the trader is holding a long or short position.
The ability for the parabolic SAR to respond to changing conditions
removes all human emotion and allows the trader to be disciplined. On
the other hand, the disadvantage of using this indicator can also be
seen in Figure 1. Notice how the signals can lead to many false entries
during periods of consolidation. Being whipsawed in and out of trades
can often be extremely frustrating, even for the most successful
Figure 2, below, shows the chart of American Express (NYSE:AXP)
from the last part of 2008. The trader can see no real way to get into a
long position as the strong downtrend continues. This is shown by the dominance of dots placed above the price.
SAR: United It Stands
Given the mechanical
properties of the parabolic SAR, it is no surprise that it is a favorite
among traders who develop their own strategies. In trading, it is
better to have several indicators confirm a certain signal than to
solely rely on one specific indicator, so most traders will choose to
compliment the SAR trading signals by using other indicators such as stochastics, moving averages, candlestick patterns etc.
example, a reversal of the dots from below the price to above is much
more convincing when the price is trading below a long-term moving
average than when it occurs when the price is above the moving average.
Having the price remain below a long-term moving average suggests that
the sellers are in control of the direction and that the recent reversal
could be the beginning of another wave lower. Furthermore, a signal is
considered stronger each time that an additional indicator confirms the
same trend. For example, diving into the American Express example again
in Figure 3, you'll notice that the parabolic SAR indicator triggered a
sell signal (black arrows) each time it neared the resistance of its
50-day moving average (green line). Traders would also take note that
the stochastic oscillator crossed below its signal line around the same
time as the SAR signals (shown by the red circles). The simultaneous
sell signals are then used as confirmation of a move lower.
The parabolic SAR is a fairly good tool
for traders looking for a strategic method of gauging a stock's
direction or for portioning a stop-loss order. As illustrated above,
this indicator proves to be extremely valuable in trending environments,
but it can often lead to many false signals during periods of
consolidation. This indicator is simple to implement into any strategy,
but like all indicators, it is usually best if it is used in conjunction
with other indicators to ensure that all information is being
newdigital, 2013.08.08 14:13
Forex traders focus on the Parabolic SAR key points of reference, which
are the “switchover” points above and below the “candlestick”
formations. As with any technical indicator, a Parabolic SAR chart will
never be 100% correct in the signals that it presents, but the signals
are consistent enough to give a forex trader an “edge”. Skill in
interpreting and understanding SAR signals must be developed over time.
In the example below, let’s develop a simple trading system based on
Parabolic SAR signals and alerts.
The following trading system is for educational purposes only.
Technical analysis takes previous pricing behavior and attempts to
forecast future prices, but, as we have all heard before, past results
are no guarantee of future performance. With that disclaimer in mind,
the “red” circles on the above chart illustrate optimal entry and exit
points, and the “green” circles indicate false SAR signals accompanied
by weak ADX readings.
A simple trading system would then be:
Determine your entry point after the SAR switchover for an uptrend accompanied by a strong ADX reading;
Execute a “Buy” order for no more than 2% to 3% of your account;
Place a stop-loss order at 20 “pips” below your entry point;
Determine your exit point when the SAR switches over at the end of the trend.
newdigital, 2013.08.08 14:17
How to Use Parabolic SAR
PriceChannel Parabolic system
newdigital, 2013.03.22 14:04
PriceChannel Parabolic system
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