Parabolic SAR Moving Average Strategy 6 Simple Rules

Parabolic SAR

Despite being developed before the computer age, Wilder’s indicators have stood the test of time and remain extremely popular. You can combine the Parabolic SAR with the index indicator to determine when to open and close positions. 2009 is committed to honest, unbiased investing education to help you become an independent investor. We develop high-quality free & premium stock market training courses & have published multiple books. We also thoroughly test and recommend the best investment research software.

  • The PSAR only needs to catch up to price to generate a reversal signal.
  • All other standard settings on OHLC/ candlestick charts are not profitable.
  • A parabolic SAR breakout strategy works best in assets that are strongly trending.
  • EP represents the “extreme point” in a trend, which would be the highest level reached during an upward move or the lowest level reached during a decline.
  • The “extreme price” will either be the highest high or the lowest low that has occurred within the relevant period.

The Parabolic SAR (PSAR) is an indicator favored by technical traders that captures reversal signals. Wilder was a mechanical engineer best known for his technical analysis developments. He has also developed the DMI (Directional Movement Index), the RSI (Relative Strength Index), and other indicators dear to technical analysts today.

Parabolic SAR Formula & Calculation

Add the latest high to the current trend list (this is just a list of all the highs that we hit during the trend, you’ll see this in action in a bit). Some people just say we’re starting in an uptrend, others initialize it randomly, and others try to get it out of the first few data points. We’re going to take this last approach to initialization with a very simple rule.

This will result in the price needing to make bigger moves to cause a reversal, and thus reversals and trade signals will occur less often. In this article, we will discuss the pros and cons of the indicator, and look at how and when it should be used. Conversely, when the asset is trading above a long-term moving average, you might focus on the SAR’s bullish signals and go long. You could still use the indicator to decide where to set a stop-loss order.

Identify hidden opportunities, master risk management, are an unreliable technical analysis chart indicator. Our 2,880 years of backtested data on 30 major US stocks show a 19% chance of beating a buy-and-hold strategy on a daily OHLC chart. Results were better using a Heikin Ashi chart, as the standard Parabolic SAR setting had a 77% reliability. There are many better indicators than Parabolic SAR, such as the rate of change and chart patterns. Our testing has proven these indicators to be much more effective, work on many timeframes, and are more successful in trading strategies.

Parabolic SAR

If that’s the case, we’ll roll right along and check for reversals, update the acceleration factor, and get the latest extreme point. The SAR was devised by famed trader Welles Parabolic SAR Wilder in his classic 1978 book on trading systems. He came up with it to help manage risk to use as a guide for trailing stop losses so he knew when to get out of positions.

Combine with other indicators

The parabolic SAR performs best in markets with a steady trend. In ranging markets, the parabolic SAR tends to whipsaw back and forth, generating false trading signals. The parabolic SAR is also a method for setting stop-loss orders.

TrendSpider is hands-down the top software for trading and backtesting the Parabolic SAR indicators; with point-and-click backtesting requiring no coding, it’s a game-changer! TradingView is also good, offing pine code backtesting and global stock exchange, crypto, and forex coverage. Microsoft Corporation plotted with
Parabolic SAR and day
exponential moving average. The SAR stop loss is plotted one day ahead, so that the stop will be activated if actual trading prices rise/fall above/below the stop, as this image from Welles Wilder’s book illustrates.

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