Parabolic SAR (PSAR)

Description

The Parabolic SAR (Parabolic Stop and Reverse) or just as "PSAR" named is a technical indicator that is used to determine the direction of a trend, identify potential entry and exit points and set stop-loss levels. It was developed by Welles Wilder and first introduced in his 1978 book “New Concepts in Technical Trading Systems”. The indicator is a trailing stop that follows the price of an asset. It is used as a momentum indicator, as it can help traders identify when a trend is slowing down or reversing.

This indicator is based on the idea that prices will tend to move in a parabolic fashion. As prices move higher, the SAR will move higher and vice versa. The indicator works by plotting a series of dots along the chart. When the dots are above the price, it indicates a downward momentum and when the dots are below the price, it indicates an upward momentum. The dots will move in and out of the price depending on the strength of the momentum.

The PSAR indicator can be used in a variety of ways. It can be used to identify potential entry and exit points, set stop-loss levels, and determine the overall direction of a trend. It is important to note that the indicator is not a crystal ball and should be used as one of many tools in a trader’s toolbox.

The indicator works by plotting a series of points or dots along the chart. When the dots are above the price, it indicates a downward momentum and when the dots are below the price, it indicates an upward momentum. The dots will move in and out of the price depending on the strength of the momentum.

The Parabolic SAR indicator is used to identify trends and potential entry and exit points. It is important to note that the indicator is not a crystal ball and should be used as one of many tools in a trader’s toolbox.

Calculation

The Parabolic SAR indicator is calculated using the following formula:

SAR = Previous SAR + Previous Acceleration Factor * (Previous High – Previous SAR)

SAR = the current Parabolic SAR value
Previous SAR = the previous Parabolic SAR value
Previous Acceleration Factor = the acceleration factor for the period
Previous High = the highest price in the period
Previous SAR = the previous Parabolic SAR value

The acceleration factor is the rate at which the SAR increases. It is calculated as follows:
Acceleration Factor = Initial Acceleration Factor * (Extreme Point Price – Previous SAR)

Acceleration Factor = the current acceleration factor
Initial Acceleration Factor = the initial acceleration factor (usually 0.02)
Extreme Point Price = the highest or lowest price in the period
Previous SAR = the previous Parabolic SAR value

Interpretation

The Parabolic SAR indicator is used to identify trends and potential entry and exit points. When the dots are above the price, it indicates a downward momentum and when the dots are below the price, it indicates an upward momentum.

The indicator can also be used to set stop-loss levels. The dots should be used as a guide and should not be relied upon solely to determine entry and exit points.

Trading Strategies

The Parabolic SAR indicator can be used to identify potential entry and exit points, set stop-loss levels, and determine the overall direction of a trend.

1. Trend Identification

The Parabolic SAR indicator can be used to identify the overall direction of a trend. When the dots are below the price, it indicates an uptrend and when the dots are above the price, it indicates a downtrend.

2. Potential Entry and Exit Points

The indicator can also be used to identify potential entry and exit points. When the dots are below the price, it can indicate a potential buy entry point. Similarly, when the dots are above the price, it can indicate a potential sell entry point.

3. Stop-Loss Levels

The Parabolic SAR can also be used to set stop-loss levels. The dots should be used as a guide and should not be relied upon solely to determine entry and exit points.

Conclusion

The Parabolic SAR indicator is a technical indicator that is used to determine the direction of a trend, identify potential entry and exit points and set stop-loss levels. It is based on the idea that prices will tend to move in a parabolic fashion. The indicator works by plotting a series of dots along the chart. When the dots are above the price, it indicates a downward momentum and when the dots are below the price, it indicates an upward momentum.

The Parabolic SAR indicator can be used in a variety of ways. It can be used to identify potential entry and exit points, set stop-loss levels, and determine the overall direction of a trend. However, it is important to note that the indicator is not a crystal ball and should be used as one of many tools in a trader’s toolbox.