In the last article on trading training we teach you what the Elder Ray indicator is and how we can use it for our daily operations. As you can see, during these last few weeks we have been focusing on showing you indicators that allow us to measure the power of the bulls and bears and, in turn, the entry or exit points in an operation. And since we don't want to lose good habits, in today's trading training we are going to talk about the parabolic SAR and how we can use it in our daily operations.
What is the parabolic SAR indicator?路♂️
Let's start the trading training by explaining what this indicator is about. The Parabolic SAR is an indicator based on time and price observation. Its creator is the great J. Welles Wilder Jr. This indicator allows us to identify the direction of the price of an asset and in turn where to find the best entry and exit points for our trading operations. It is similar to other indicators such as the RSI or the stochastic RSI that we already explained in previous installments of the trading training series. At the same time, it also tells us moments in which the price makes a stop or a reversal of the current trend. Precisely the acronym SAR means “Stop And Reversal” in English.
How is the parabolic SAR indicator measured?
Let's now see how this indicator is measured to understand in depth how it works. As we can see in the chart below, the parabolic SAR is made up of a sequence of points that accompany the price action. As we have commented in the previous paragraph of this trading training, the acronym SAR refers to stops and reversals in the price of an asset.
The term parabolic accompanies these acronyms since, as we can see, the points that are generated along with the price action usually form a type of parabola. So, the SAR is below the price in uptrends and above it when it is in downtrends.
How is parabolic SAR calculated?燐
Parabolic SAR can be calculated in different ways depending on the type of trend you are on. Although by default it uses the highest and lowest prices with a combination of the acceleration factor to calculate the path taken by the indicator. Therefore, the formula for calculating the parabolic SAR would be the following: Acceleration factor (FA): With the acceleration factor, as we have commented in this paragraph, it shows us the path of the indicator over the price of the asset. Extreme Point (EP): These are both the highest price reached in an uptrend and the lowest point in a downtrend. In combination with the acceleration factor, it delimits the path of the indicator.
How can we take advantage of the parabolic SAR in our trading training?
In order to efficiently take advantage of this indicator, we must combine it with other indicators, since using it individually is not enough to operate it safely. We recommend that you combine the use of this indicator with others that we have taught you in other trading training articles. The most optimal options would be to use it with the moving averagesneighbourhood, Stochastic RSI (also created by J.Welles Wilder Jr.), the ADX or Elder Ray that we teach you in the last installment of trading training articles. The reversal levels of this indicator can be used to establish the stop-loss of our operations. Let's see then what types of signals we can take advantage of with the parabolic SAR:
Buying signals.
To detect buy signals from this indicator, just observe when the SAR is above the price in a downtrend. Therefore, if we observe a situation in which the SAR is above, we will be facing a potential trend reversal in the asset in question.
The definitive one is to observe the moment in which we see that the SAR stops being above the price and becomes below it. Although we remember that we must combine it with other indicators to have accurate signals, since it can also give us false signals.
Sales signals.
To detect sell signals, follow the same steps but in reverse. Just look at when the SAR is below the price in an uptrend. Therefore, if we observe a situation in which the SAR is below, we will be facing a potential trend reversal in the asset in question.
The definitive one is to observe the moment in which we see that the SAR stops being below the price and becomes above it. We must also be extremely cautious when interpreting these signals, because as with purchases, it can also give us false signals.
Conclusions from this trading training on the parabolic SAR indicator.
Now concluding this trading training, we have seen the benefits that using the parabolic SAR indicator gives us. As a recommendation, this indicator works best in stable markets where trends can be defined more easily. In turn, by observing the distance between the points generated by the SAR and the price we can determine the strength of the present trend.
Although we remember once again that it is advisable to use it together with other indicators, such as those mentioned previously in this trading training. Additionally, in Tradingview you have an automatic strategy available to use with the parabolic SAR together with the indicator's success statistics (chart above), although it should be used with caution.