Parabolic SAR

One of my favorite technical indicators during trending markets is Parabolic SAR. This indicator by Welles Wilder, who also created the Relative Strength Index (RSI) indicator, aims to identify trend reversals. The name SAR is an abbreviation for “Stop And Reverse”. The indicator is displayed in the price data window and consists of dots that are either on top or under the current price.

A buy signal is triggered when the price increases and overruns the dot in its path. This scenario is illustrated in the image below, where the overrun dot was in the center of the orange circle, but disappeared and instantly re-created below the same candlestick. The SAR dots that follow will progress along with the trend until the price takes a downturn and overruns a dot again, signaling the end of the trend and giving us the hint to close our current long position. This works similarly for short positions.

psar

Please note that the Parabolic SAR indicator is pretty much useless in ranging markets, as the price frequently changes direction and is likely to produce an abundance of false signals.

 

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