Wilder introduced the Parabolic Time/Price System in his 1978 book, New Concepts in Technical Trading Systems. The trend-following indicator helps traders to identify the uptrend and downtrend. You can make an entry and exit by following the dots of the indicator. Here, in this content, you will get an entire picture of the Parabolic SAR indicator along with its user settings, calculations, and more details.
Parabolic SAR Indicator FAQ
Parabolic SAR is one of the most useful additions by J Welles Wilder. Basically, traders apply the indicator to determine trend direction as well as potential reversals in price. The indicator mainly uses trailing stops and the reverse technique, refer as to SAR. Undoubtedly, it is a good indicator of trend identification.
Parabolic SAR works quite clearly. When the price of a security rises, the PSAR dots also rise. Though the rising is slow at the initial stage, it accelerates with the trend. The PSAR works really well for capturing profit, and targets and also limiting loss.
No, absolutely not. Parabolic SAR won’t repaint. Once the PSAR dots are plotted on the chart, they will remain there, even after changing the timeframe. There is no repainting option available.
The answer is Yes, it is. Basically, it is a trend-following or lagging indicator. Traders apply this to set a trailing stop loss or identify entry-exit points. Here, you can also see a greater number of reversals, as well as SAR, lagging further from price.
Features of Parabolic SAR Indicator (PSAR)
- The original name of the indicator was the Parabolic Time/price system. Here, SAR is the acronym for “stop and reverse”. As the name suggests, the indicator finds the potential reversal in the price of a trend.
- The PSAR appears on charts as a series of dots. It moves either above or below the price of a security.
- The change in the direction of dots produces trend signals on the chart.
- Traders can also use candlestick charts, MA (moving average), or other technical tools along with ASAR to get better results.
- The indicator has three primary functions, shows the current price trend, provides a potential entry signal, and also the exit signal.
Calculation of the Parabolic SAR Indicator
- Here, Current SAR = Prior SAR + Prior AF(Prior EP-Prior SAR)
- To calculate Uptrend PSAR = Prior PSAR + Prior AF (Prior EP – Prior PSAR)
- Downtrend PSAR calculation= Prior PSAR – Prior AF (Prior PSAR – Prior EP)
Here:
- EP is the Extreme Point, the highest high of the current uptrend.
- AF means the Acceleration factor, starting at 0.2, AF increases at 0.2 each time the extreme point makes a new high. One thing you must remember is that the maximum reach of AF is .20.
Set up Parabolic SAR on Charting Platforms
Here, we are going to go through the usage and settings of the particular indicator. To make the concept clear, I use two different trading platforms, Zerodha Kite, and Upstox Pro.
PSAR On Zerodha Kite
In the Zerodha Kite platform, traders can find the Parabolic SAR under the STUDIES section. They can attach the Parabolic SAR to any chart – be it daily, weekly, monthly, or intraday. The Minimum AF is 0.02 and the Maximum AF is 0.2. Also, we can set the Minimum AF and Maximum AF to high or low which depends on the result. Check the image below where we attached the moving average indicator on Reliance Industries shares price chart.
PSAR On Upstox Pro
Setting up the PSAR on Upstox Pro is quite simple and easy. After login, into the account, open any chart and then the indicator section. Then put the name of the indicator in the search section. After that, click on Apply.
Technical Trading Strategies with Parabolic SAR
So, as we know Parabolic SAR helps to determine the future short-term momentum of a given asset. To use the indicator effectively, there are some top strategies of it. These can turn your portfolio into the most profitable one. Let’s start with the very basic strategies, then we will move toward the advanced ones.
Basic Trading Strategy with Parabolic SAR
The basic application of the Parabolic SAR is to buy when the PSAR dots move below the price bars. It is signaling an uptrend. On the opposite side, sell or short-sell once the dots move above the price bars. This is signaling a downtrend.
It is never decreasing in an uptrend and it continuously protects profits in advance. The indicator acts as a guard against the propensity to lower a stop-loss. In this indicator, when the price stops rising and reverses below SAR, then a downtrend starts and SAR is above the price. SAR follows prices lower like a trailing stop and this continuously falls as long as the downtrend extends.
Advanced Trading Strategies with PSAR Indicator
Parabolic SAR and MACD Strategy
The first strategy we are going to look into is the PSAR and MACD strategy. First of all, set the two indicators on your chart. Here, to set an example, I’ve taken the Zerodha Kite chart. Both of the indicators’ set up are in default settings.
Now, have a look at the above picture. Here, the green histogram of the MACD cross above the 0 lines, and PSAR also indicate the buy signal by coming below the price level. Once both indicators suggest buyers’ demand, buy the stock at that point. Oppositely, once the red histogram crosses the 0 line below and PSAR goes above the price, book profit and sell. You may take the short-sell entry from there as well.
Parabolic SAR and ADX Strategy
Here, we’ve used PSAR along with ADX (Average Directional Index). In ADX, there are three lines, Minus Directional Indicator, Plus Directional Indicator, and, ADX line. So, the red line is (-DI), the green is (+DI), and the white one is ADX.
Buying Strategy
- ADX line must be above 20 levels.
- (+DI) should be above the (-DI) line.
Short Selling Strategy
- Same, the ADX line must be above 20 levels.
- (-DI) is above the (+DI) line.
Now, let’s get into the above chart, once PSAR moves below the price level (Bullish sign), buy the asset at the crossing point where (+DI) crosses the (-DI) and goes above. Reversely, sell, or short sell the asset once the (-DI) cross (+DI) below. In both of the scenarios, the ADX line must be above 20 levels.
Parabolic SAR and Supertrend
Let’s move on to the next strategy, PSAR, and Supertrend. In this chart, we’ve taken a 7-period Supertrend with 3 multipliers. The PSAR is with the default settings.
Here, observe the chart over here. When both the Supertrend and PSAR originate buying signals, you can buy at that price. Now, look at the highlighted buy area, there Supertrend comes with a buy signal and PSAR is also below the price level, indicating buyers’ entry at that level. The opposite scenario happens during the sellers’ point. A SuperTrend sell signal appears with a big bear candle.
Parabolic SAR and Moving Average Strategy
This is one of the most vital strategies of Parabolic SAR with MA (moving average). For your understanding purpose, we divide the strategies into two steps, basic and advanced. Let’s go through the basic strategy first.
In the above chart, there is a 100 MA (moving average) along with Parabolic SAR. The strategy is quite straight and simple. Buy any asset once the price crosses the 100 MA and PSAR dots are below the price line. Do the opposite of getting the sell signal. The buy and sell points are highlighted in the picture.
This strategy is more advanced in comparison to the previous one. Here, we take 100 MA and 50 MA together. You can buy once the 50 MA goes above the 100 MA, the crossover point can be the buying level. Reversely, sell or short selling occur at the crossover of 100 MA above 50 MA.
Parabolic SAR and RSI Strategy
RSI is the Relative Strength Index indicator. It identifies the strength of the current market trend. Here, we have taken 14 periods RSI, 80 level is overbought and 20 is oversold.
You can take trades on the dips of the RSI near the oversold level and exit near an overbought level. In the picture, green highlighted areas are the buying opportunities whereas red highlighted areas are selling opportunities.
Parabolic SAR and Stochastic Strategy
This is the last strategy of this content. Here, we take Stochastics along with the PSAR. Like RSI, in the Stochastics also, 80 is the overbought level and 20 is the oversold level. Here, when the fast line (white) crosses above the red (slow) line, the buyers’ movement becomes active. And, reverse scenario occurs during the sellers’ activity.
You can grab the buying opportunity at the dips of the Stochastic near the oversold level. Once the fast line crosses the slow line in the oversold level, buyers may take entry there. Reversely, when the slow line crosses the fast line at the overbought level, sellers get active. The buying-selling points are highlighted in the above picture.
Conclusion
The Parabolic SAR works best with trending securities. This indicator is designed to catch the trend and follow it like a trailing stop. The signal quality of this indicator depends randomly on the settings and the characteristics of the underlying security. The wrong settings will result in whipsaws, losses, and frustration. Also, there is no golden rule or one-size-fits-all setting. Each security should be evaluated based on its own characteristics. This indicator should also be used in conjunction with other technical indicators and technical analysis techniques.