The parabolic SAR indicator is a technical indicator designed to ascertain trend direction and points of potential price reversal.
The indicator shows up on the chart as a series of dots. A dot below the price indicates a bullish trend, whilst a bearish trend is indicated by a dot above the price. This is particularly useful for at-a-glance chart appraisals and clutch decision making in a short-term trading context.
- Use the BTSE platform to plot your Parabolic SAR.
- A dot below the price is bullish.
- A dot above the price is bearish.
- Traders commonly buy when the dot first moves from above to below the price.
- Traders commonly sell when the dot first moves from below to above the price.
- Parabolic SAR works best in trending assets.
- Use in conjunction with moving averages to reduce false signals.
- Parabolic SAR can also be used as a trailing stop loss to lock-in profits.
How To Use The Parabolic SAR Indicator
Step 1: Load up a chart on the BTSE platform.
Step 2: Click on the “indicators” tab or push the “/” key:
Step 3: Click on “Parabolic SAR” in the dropdown menu:
Step 4: Admire your newly plotted Parabolic SAR:
How To Trade Using Parabolic SAR
- A dot below the price is bullish
- A dot above the price is bearish
This doesn’t necessarily translate to buying when the indicator is bullish and selling when it is bearish. Instead, the indicator provides an easy to understand “at a glance” indication of whether it considers an asset to be in a bullish or bearish trend.
In terms of trade signals, some traders like to wait for the first bullish dot to buy and the first bearish dot to sell. However, this strategy has been known to generate a lot of false signals in sideways markets.
Therefore, Parabolic SAR is often used in conjunction with other trend identification indicators to smooth out price action and reduce false signals.
In the below example, we have used a simple moving average (MA) to provide a smoothing filter:
- If the price is above the MA, Parabolic SAR can only generate buy signals.
- If the price is below the MA, Parabolic SAR can only generate sell signals.
In this cherry-picked example, the combined system avoided a false buy signal in the circled area that would have caused the trader to miss a large part of the move.
Risk Management With The Parabolic SAR
The dots of the Parabolic SAR indicator are pulled by price, but not pushed. This means that the dots will only move closer to the price and never further away.
As a result, traders might use the Parabolic SAR as a quick at-a-glance trailing stop-loss level when entering orders. As the trade moves further into profit, the Parabolic SAR will move closer to the price and lock in profits.
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