First introduced by technical analyst Willes Wilder in 1978, the PSAR indicator – when used properly, gives traders a cutting edge in the market. In this article, we’ll discuss the in’s and out’s of this indicator and show you how you can use it as part of your trading strategy.
Profitable traders use the PSAR indicator to determine whether the current price trend will continue or reverse. But there’s more, it also assists traders in determining proper entry and exit points. Keep reading, and I’ll show you how!
Also known as the “stop and reversal system,” the PSAR indicator appears as a series of dots either on top or below candlesticks. We interpret the end result in one of two ways.
Firstly, a dot below the candlestick is deemed to be a bullish signal. Conversely, a dot above the candlestick means that the bears are in control. At the same time, you need to be careful as momentum is likely to remain downward.
As the price of a stock rises, so do the dots. At first, they rise slowly, then they pick up speed and accelerate with the trend.
As the trend develops, the PSAR indicator starts to move a little faster, and the dots soon catch up to the price. If can help you predict when a stock will go up.
When the dots on the PSAR indicator flip, buckle up. It means that a potential change in price direction is underway.
As a trader, this is valuable information to know for obvious reasons. If you’re thinking of going long on a stock but the dots are above the price, you wait for the dots to flip.
Once the dots flip below the price, it’s a strong signal of a further rise in price. Now is your time to enter.
$AAPL Daily Vs Weekly Chart TrendSpider With PSAR: Notice how we have daily candles vs the weekly time frame of $PSAR and how we could of identified a SWING TRADE trend due to the weekly PSAR dots? Yeah, us too 🙂
Did you know that the PSAR indicator is a great way to set stop-loss orders? Let me explain. In a scenario where your stock price is rising, simply move your stop-loss to match the parabolic SAR indicator.
The fundamental concept applies to your short position—as the price falls, so will the indicator. All you need to do is move your stop-loss to match the indicator’s level after every price bar.
In life, it’s best not to have all your eggs in one basket; the same goes for trading. Undoubtedly, it’s wiser if you have a few indicators – but not too many, to confirm your trade signal than to rely solely on one specific indicator.
Many traders like to use stochastics and moving averages – the 21-day EMA to be exact, in conjunction with the PSAR indicator. Personally, these are the only three indicators I have on my chart right now.
There’s no one size fits all approach; find the indicators that work for you, and you will find your profits. Let’s take a look at a real-life example using moving averages in the image below.
When the price is trading above a long-term moving average, PSAR buy signals are seen as much more valid and convincing. Translated into simple language, this means the buyers are in control of the price direction.
Plus, combined PSAR buy signals can be interpreted as the beginning of another push up. Alternatively, when the price is below the moving average, your sell signals are when the dots move from below to above.
Without a doubt, the indicator works fabulously in markets trending up and down. But, this is another story in markets that are moving sideways or choppy.
During sideways periods, the PSAR indicator gives multiple poor, false trading signals; the chart in the beginning shows this.
The parabolic SAR is worth its weight in gold as it tells us price direction along with new long or short trade signals. In a market trending strongly up or down, it works fabulously.
However, as I mentioned above, it produces many false signals and losing trades when the price starts moving sideways. To avoid this situation, only trade in the dominant trend direction when using the PSAR indicator.
Regardless of the indicators used, you need to have the knowledge behind you if you want to win at this game. Nowadays, new traders will jump in with all their cash without developing their skills.
Luckily, with Bullish Bears, our courses are free. There’s no need to rush the process; take your time to build your strategy and the right indicators for you.