Parabolic SAR Indicator: Understand and Apply
In trading, profits or losses are defined by a trader’s ability to anticipate price action. Several indicators can assist in predicting future price action, but few are as easy to interpret as the parabolic SAR indicator.
The parabolic SAR (Stop And Reverse) is an indicator traders use to determine the short-term directional change and the point on the chart when this momentum shift has a higher-than-average probability of taking place. The SAR uses price and time components to create buy and sell signals.
Commonly using daily or weekly time frames, the indicator is utilized to establish where stop-loss orders can be placed. The SAR is visible on charts using dots or lines that you can customize. However, it’s best to use default settings.
Using a Tradingview parabolic SAR indicator, this is shown on the PYPL chart below:
The SAR follows price is essentially a trend indicator. Once a reversal takes place within a downtrend and turns upward, the indicator will follow the price action. The parabolic SAR continuously increases as long as the uptrend remains valid. As a result, the SAR never falls within an uptrend, so when the price crosses the SAR to the downside, the short-term uptrend has essentially reversed.
Once the price stops rising and reverses below the parabolic SAR, a downtrend starts, and SAR moves above the price. The SAR will then follow price action lower. The SAR will continuously fall as long as the downtrend continues. As a result, the parabolic SAR never rises within a downtrend. So when the price crosses the SAR to the upside, the short-term downtrend has essentially reversed.
Simply put, you want to be long when the SAR is below the price and short when the SAR is above the price.
Buy and Sell Signals
Parabolic SAR buy signals occur when the price breaks and closes above the SAR. When the SAR crosses over from being above the price to below the price, traders can go long on the trade.
The sell signal occurs when the price breaks and closes below the SAR. When the SAR crosses over from being below the price to being above the price, traders can go short on the trade.
Here is an example on the 5-minute chart for AAPL:
Overall, the parabolic SAR is a great tool and indicator for all types of traders. From beginners still trying to find the best entries and exits to experienced traders looking for quick scalps, this tool is a great addition to any trader’s toolbox.
If your trading/charting platform doesn’t offer parabolic SAR, you can try TradingView for free. It’s a reliable platform that is easy to use and comes with tons of features. I even wrote a review on it.
As always, the best signals come from multiple sources. Above all, price is what matters the most.