Parabolic SAR can help investors identify market trends more effectively. The Parabolic SAR indicator provides accurate buy and sell signals, especially in trending markets. In this article, Crypto Trading will help you learn more about this indicator and how to apply it to effective crypto investment trading.
Basic information traders need to know about Parabolic SAR
Parabolic SAR is one of the indicators introduced by Wilder in his 1978 book “New Concepts in Technical Trading Systems”, alongside other indicators such as RSI, ATR, and ADX.
What is the concept of Parabolic SAR?
This indicator was developed by Welles Wilder, a technical indicator based on price and time. Wilder called it the “Parabolic Price/Time System”. Where SAR stands for “stop and reverse”. This indicator closely follows the price action when the market trend is prolonged.
On the chart, this indicator is displayed as points. If the indicator point is below the current price, it is a bullish signal. If the indicator point is above the price, it is a bearish signal. These signals can be used to determine stop loss and take profit levels.
AlthoughWilder’s indicators were developed before the computer era, they are still widely used. They have proven their effectiveness over time.
See more: Know MACD for perfect crypto transactions
Characteristics of Parabolic SAR
After introducing the basic concept of Parabolic, let’s now delve into the outstanding features of this indicator:
- Dot-matrix representation: Represented by a series of small dots linked together. It forms a dashed line.
- Reflecting market trends: When the market is in a strong trend (up or down), the gap between this indicator and the price line will widen. Conversely, during a sideways market (no clear trend), the price line and the Parabolic SAR line will continuously intersect.
- Trend Change Forecast: When the lines change position relative to the price line. This indicates that the market trend is likely to become more volatile in the future. For example, when the indicator line moves from above to below the price line. This may be a signal that prices will move higher.
- Determining Stop Loss: The characteristics indicator makes it very suitable for determining stop losses. Traders can place stop-loss orders corresponding to this indicator level.
These outstanding features show that this is a very useful technical analysis tool. It helps investors grasp market trends and manage risks more effectively.
Parabolic SAR indicator calculation formula you may not know
This indicator uses the highest and lowest prices as well as an acceleration factor to calculate the position of points on the chart. The formula is as follows:
During the rising price phase:
PSAR = Previous Parabolic SAR + Acceleration Factor (Max Point – Previous Parabolic SAR)
During the price decline:
PSAR = Previous Parabolic SAR – Acceleration Coefficient (Previous Parabolic SAR – Minimum Point)
In there:
- AF (Acceleration Factor): This is the acceleration factor. It can be adjusted to change the sensitivity of the indicator. The most common value is 0.02.
- EP (Extreme Point): This is the extreme point. It is the highest price in an uptrend or the lowest price in a downtrend.
This formula helps to determine the location of Parabolic SAR points, which provide signals about the market trend.
Advantages and disadvantages of Parabolic SAR indicator
Overall, this indicator is a very useful technical analysis tool. It helps traders enter the market effectively. Here are the advantages of the indicator that every trader should know.
Advantages of Parabolic SAR
This indicator is a useful tool for determining price trends in the market. Some of the main benefits of using this indicator include:
- Identifying Price Trends: When the market has a clear trend, it provides very useful buy/sell signals. It will help traders easily identify the trend.
- Reversal Signals: When there is a change in the price trend, this indicator will give buy/sell signals when a reversal is likely to occur. This helps to catch important moments to adjust positions.
- Effective in Trending Markets: This indicator works best in markets that have been trending up or down for a long time. When this indicator can provide many accurate signals.
What are the limitations of Parabolic SAR?
However, this indicator also has a notable limitation. This indicator can generate false signals when the market is sideways. It will move back and forth around the price bar. This will result in inaccurate buy/sell signals.
When an investor relies solely on Parabolic SAR, this can lead to trading losses. Therefore, to avoid these risks, investors should:
- Only invest in the direction of the main trend, and avoid trading when the market has no clear trend.
- Combine this indicator with other indicators such as moving averages. Using multiple indicators at the same time will help to give more accurate trading signals.
Crypto trading strategy with Parabolic SAR
This is a useful technical analysis tool, but it is still necessary to diversify the analysis tools for the best trading efficiency. Let’s see what the strategy is when combining indicators with Parabolic SAR.
Combining the Parabolic SAR indicator with the MA line
When combining this indicator with short-term (MA20) and long-term (MA40) moving averages, the following signals can be used to determine the market trend:
Downtrend:
- The MA20 line moves from above to below, proving that MA20 has crossed MA40 in a bearish direction.
- The points above the price, signaling the continuation of the downtrend.
These signals appearing together will confirm the downtrend, helping investors exit buy positions or open sell positions.
Uptrend:
- MA20 line moves from below to above MA40, proving the uptrend.
- Points below the price, signaling the uptrend is continuing.
These signals appearing together will confirm the uptrend, helping investors participate or open buying positions.
Note: These signals may not appear at the same time. However, when both of these factors appear together, the signal is confirmed.
Combining Parabolic SAR with RSI indicator
This is a popular approach in technical analysis. Combining this indicator with RSI will help to better understand the trend and momentum of the market.
Parabolic SAR is a trend indicator, reflecting the movement of prices. RSI is an oscillator, which can measure the speed and change of price movements. When these two indicators are combined, investors can identify potential buy/sell signals. When RSI shows overbought or oversold conditions, and Parabolic SAR confirms a possible reversal. This may be the right time to make trades.
See more: Instructions for opening an OKX exchange account
Combined with MACD Convergence Divergence Moving Average
Another approach to technical analysis is to combine it with MACD. What is MACD? An indicator that measures the relationship between two moving averages of prices. It provides information about momentum and trend direction.
When using MACD and Parabolic SAR together, traders can find more reliable buy/sell signals. The signals from both indicators align with each other. This can provide better entry and exit points for trades.
Combining multiple technical indicators such as RSI can also help confirm buy/sell signals. When multiple indicators give a consensus signal, trade orders become more reliable. Using a suitable set of technical indicators can help investors make more effective trading decisions.
Epilogue
Above Crypto Trading has provided a lot of information about the Parabolic SAR indicator. As mentioned, Parabolic SAR is a valuable technical analysis tool. It helps investors determine the direction of price fluctuations and trend reversal points. However, it should not be used independently but should be combined with other indicators and analysis strategies. Consensus between indicators will help increase the reliability of signals. Don’t forget to follow our upcoming articles to learn more interesting articles!
Frequently Asked Questions?
How to use the Parabolic SAR indicator for newbies?
Flexible use of the following methods:
- Determine trend direction
- Determine the indicator’s trend reversal potential
- Place a stop-loss order
- Confirm further with some other indicators
What are the salient features of the indicator?
The salient features of this indicator are:
- Represented by a series of small dots
- Reflect market trends
- Forecasting trend changes
- Determine stop loss
Why combine Parabolic SAR with other indicators?
This indicator has its limitations, especially in sideways markets. Therefore, it is important to be flexible in your approach and adjust your method to market conditions.
By using this indicator properly along with other analytical tools, investors can improve trading efficiency and achieve success in the financial markets.
