The parabolic sar is a technical trading indicator that is used to predict the direction of a stock. It also creates awareness to when a stock might be reversing direction. SAR actually stands for stop and reverse. It was developed by Welles Wilder who also created RSI. He called it the parabolic time/price system. The sar is the actual technical indicator used.
Table of Contents
What Is the Parabolic Sar Indicator?
The parabolic sar is a popular and good technical trading indicator. Traders use this indicator for price direction. The parabolic sar indicator’s goal is to give traders the edge by highlighting price direction as a stock is moving as well as entries and exit points.
This indicator follows price and also draws attention to changing prices. You can use the parabolic sar whether going long or short. On a chart, this technical indicator is a series of dots that are either above or below candlesticks.
The Trend Is Your Friend
A dot that’s below price is a bullish sign. Conversely, a dot that’s above price is seen as a bearish sign. However, since there can be a lot of price break fake outs, this indicator works best in a strong trend.
If a stock is trading sideways, it has more fake buy and sell signals when price is trading in a range.
You’ve probably heard traders say “the trend is your friend”. It’s true. Trends, whether bullish or bearish, are much easier to trade in. When the market can’t chose a direction, many times stock follow suit.
The parabolic sar follows price so it’s seen by traders as a trend indicator. For example, if price is in a bearish trend but a bullish reversal pattern such as morning star pattern, look for the downtrend to reverse.
Once the downtrend has reversed a new bullish trend is in place. The opposite is also true. Once a bullish trend reverses, the sar trades above the candlesticks. Trend trading is much easier because price chooses a direction and moves with it.
Using the Parabolic Sar Indicator as a Stop Loss
Did you know the parabolic sar can be used as a trailing stop? The trailing stop or parabolic sar continually rises as long as the bullish uptrend is in place.
This can be a great tool if you’re a day trader and don’t want to place a stop loss order or you’re a hot key trader. You can still be trading risk management without alerting market makers of your mental stop.
The opposite is true as well. Shorting a stock also uses the parabolic sar stop loss. Once the sar is above price, it trails downward as price heads down.
In other words, it will never decrease in an uptrend or increase in a downtrend. As a result, it continuously protects profits whether long or short.
Using Other Indicators
It’s important to realize that other technical indicators should be used in conjunction with the parabolic sar indicator. Using other indicators such as RSI, moving averages and MACD gives more confirmation.
A bearish trend is much more believable if the sar is above price while price is below moving average lines. The sell signals are then strong and can be trusted.
If price is trading above the moving average lines but below the parabolic sar trading indicator, then traders can trust the buy signals. Using other technical indicators are helpful with confirmation.
Trading on patterns alone could be dangerous. Especially if you don’t know what they mean. When candlesticks are coupled with technical indicators, you’re trading safer.
However, these aren’t a crystal ball into the future of a stock. Nor does a stock always do what the charts are showing. Nothing in trading is 100%. It’s important to remember that.
Using the Parabolic Sar Indicator for Swing Trading
You can use the parabolic sar for any type of trading. However, since this works the best in trends, it can be a great swing trading tool. You can ride the trend up than down.
Swing trading is much easier to do when stocks are in a strong trend because you’re holding at least overnight. However, the typical swing trade lasts 3-6 days up to two weeks.
As a result, watch the parabolic sar indicator and price movement. You can even use it at a long term trailing stop loss for swing trading. Remember to get confirmation of any changes in trend with other indicators as well as candlesticks and patterns.