Parabolic SAR indicator is one of the favorite tools of crypto traders. So what is the use of the PSAR indicator? Can the indicator be used independently to make decisions? Or do traders need to combine PSAR with other indicators such as MA lines, Bollinger bands in trading, etc. to increase accuracy in technical analysis? learn details about the PSAR indicator with Crypto Trading in the following article.
Decoding Parabolic SAR indicator
Parabolic SAR indicator (PSAR) is used to determine the direction of movement of an asset.
What is Parabolic SAR?
The Parabolic SAR technical indicator was developed by J. Welles Wilder. This indicator is capable of determining the direction of movement of an asset. PSAR is also known as the Stop and Reverse system. It aims to identify potential reversals in the price movements of the traded asset. PSAR can also be used to determine entry and exit points.
Parabolic SAR is effective in trending markets. Wilder recommends that traders first establish the direction of the trend using the Parabolic SAR. Only then should alternative indicators be used to measure the strength of the trend.
When plotted on a chart, the Parabolic SAR Indicator is displayed as a series of dots. If the series of dots appears below the current price, the Parabolic SAR is interpreted as a bullish signal. When the series of dots is positioned above the current price level, it is considered a bearish signal. These signals are used to set stop loss and profit targets.
Discover what is the Parabolic SAR calculation formula.
PSAR uses the highest and lowest prices as well as the acceleration factor to determine where the PSAR indicator dot will be displayed.
The formula for the Parabolic SAR indicator is as follows:
- Uptrend Parabolic SAR = Previous SAR + Previous AF (Previous EP – Previous SAR)
- Downtrend Parabolic SAR = Previous SAR – Previous AF (Previous SAR – Previous EP)
In there:
- EP is the extreme point (bottom or top) in a trend. That is, the highest point the price reaches during an uptrend. Or the opposite, that is, the lowest price is reached during a downtrend.
- AF is the acceleration factor initially set to a value of 0.02 (it increases by 0.02 each time an EP is recorded, up to a maximum of 0.20). Traders can choose the acceleration factor. This choice depends on the trading style or trading tool you are using.
The results obtained from the above calculations create a dot that is plotted on the asset price chart, either below or above it. These dots help determine the current direction of the price.
Learn the pros and cons of Parabolic SAR
Parabolic SAR is loved by many crypto traders because of its outstanding advantages such as:
- By providing clear signals about trends and timing, PSAR helps traders easily identify and grasp market trends.
- PSAR provides traders with information to predict potential reversal points. Thanks to that, traders can trade intelligently and manage risks effectively.
- Thanks to the price chart visually displaying the Parabolic SAR model, traders can easily monitor, determine buy/sell points and set stop loss points.
However, traders also need to consider the following limitations of PSAR:
- The effectiveness of Parabolic SAR declines during periods of sideways markets. This has the potential to create false signals and inappropriate transactions.
- Traders can adjust the sensitivity of PSAR. However, increasing/decreasing sensitivity can lead to an increased risk of false signals.
- Because it does not take trading volume into account, PSAR can provide inaccurate signals, especially when used alone.
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Tips for using Parabolic SAR indicator
Parabolic SAR will be more effective if you combine it with another tool. If you know about Bollinger bands, you may see what these two tools have in common. These two tools are capable of measuring price and market movements. However, in the crypto market, combining PSAR is not often mentioned as best settings for bollinger Bands, so we will learn how to combine PSAR with other tools in the information below.
Combine price channel and Parabolic SAR indicator
- Trading in the same direction: In an uptrend, when the Parabolic SAR indicator appears below the price chart and the price enters the support zone, traders should take advantage of the opportunity to open a buy order. However, if PSAR is on the price chart and the price simultaneously enters the resistance zone, it is time to place a sell order.
- Reversal trading: Traders can wait to open a sell order when the price hits the resistance area and the PSAR is on the price chart while in an uptrend. Conversely, if in the case of a downtrend, PSAR moves below the support zone and the price simultaneously reaches the resistance zone, traders can consider opening a buy order.
Combine support and resistance levels with the Parabolic SAR indicator
Prices tend to fluctuate strongly when they reach support and resistance zones. Combining Parabolic SAR with support and resistance levels will create more accurate trading signals and improve market entry points.
When PSAR gives a dot signal below the price and the price approaches the support zone, it is time to buy. The reason is because there may be a strong price increase. However, if PSAR gives a dot signal below the price but the price is approaching the resistance area, you should wait for other signals to confirm. At this time, there is a high possibility that the price may reverse.
When PSAR creates a dot signal on the price and the price is approaching the resistance area, this is a selling opportunity. At this time, the price is likely to drop sharply and bring high-profit opportunities to traders. However, if PSAR gives a dot signal on the price but the price is near the support zone, you should consider waiting for other signals. There is a high risk that prices will recover strongly.
Combine MA and Parabolic SAR indicator
Moving averages (MA) are one of the classic indicators to determine market direction. It even suggests a possible price reversal. A research team at the University of Houston-Victoria tested the reliability of both the MA and SAR indicators. The results show that the Parabolic SAR indicator has a confidence level of up to 95%. Meanwhile, the MA line did not achieve the same results.
Therefore, many crypto traders started combining both of these indicators in the same trading strategy. This combination provides better results than using PSAR alone.
Combining the MA line with the Parabolic SAR is not too difficult. To use a buy signal from PSAR, traders need to confirm that the MA is below the price chart. Conversely, to use a sell signal, the MA line needs to be on the price chart. In this way, traders can improve their ability to predict the direction of the market.
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What are the tips to increase the effectiveness of using Parabolic SAR?
To increase the efficiency of using Parabolic SAR and avoid errors, traders need to note the following 4 things:
- Combine Parabolic SAR with other technical analysis tools to improve signal accuracy. At the same time, it also reduces the possibility of misidentifying signals.
- Adjust the acceleration and sensitivity to suit your trading style and the asset you are trading.
- Use the Parabolic SAR as a risk management tool by setting stop losses based on the indicator values.
- Be cautious when using Parabolic SAR in sideways or range-bound markets. The reason is that there is a high possibility that it may generate false signals.
Summary
Hopefully, with the article about the Parabolic SAR indicator, traders have grasped the advantages and disadvantages of this tool. We also hope you have advanced knowledge of how to use PSAR. Don’t forget to follow the Crypto Trading blog to learn about similar topics.
FAQs
Parabolic SAR indicator Which year was released?
PSAR was first introduced in 1978. It is the main subject of the book “New Concepts in Technical Trading Systems”. Welles Wilder is the father of PSAR and also the author of the book.
What indicators can complement Parabolic SAR?
Momentum indicators such as MACD and RSI can be combined with PSAR. RSI Indicator shows overbought/sold conditions and PSAR confirms a possible reversal. This is the signal for crypto traders to take action. MACD will measure the relationship between two MA lines of the asset price. It provides information about momentum and trends. MACD and Parabolic SAR signals meeting each other can help crypto traders identify better entry and exit points.
What do the dots represent in Parabolic SAR?
PSAR dots represent potential reversal points in the price trend.
