How to Use the Parabolic SAR Indicator
The Parabolic SAR indicator is a way to keep an eye on the momentum of your trading. It shows you what the price should do based on trend, velocity, and volatility.
The Parabolic SAR is not just for momentum traders; it can be applied to any strategy that relies on technical analysis. Follow along with us as we show you how to use this handy indicator in whatever market you’re trading!
How to Use Parabolic SAR
Below are some various ways how you can use this indicator:
1. Identifying Trend
First, let’s learn how to use the Parabolic SAR indicator to identify the underlying trend. There are two basic conditions for recognizing a trend:
- Acceleration or velocity of the price action (up or down) above or below 60% of its MFI or EMA on a period from 5-20 periods. (Note: The Parabolic SAR indicator is not directional; it measures acceleration, not direction.)
- The price has low or high volatility. (Note: The Parabolic SAR not only measures volatility but also shows its variation.)
Once you have the two conditions met, you should be able to spot a trend. It’s easier to identify a trend when there is acceleration or velocity above or below 60% of its MFI or EMA. You will see that this indicator will change colors when this condition is met.
2. Identifying Momentum
The second and equally important way to use the Parabolic SAR for momentum trading is by using the indicator in conjunction with either a Relative Strength Index (RSI) or Average True Range (ATR).
You can use the Parabolic SAR to analyze either price movements or volume. Here are some examples of how you can use this indicator:
- When analyzing volume, you should look for low volatility on a trend day. The Parabolic SAR signal bars will be black, indicating that there is an increase in the price and volume of the trade.
- When using Momentum for price movement, you should look for high volatility on a trend day. The Parabolic SAR signal bars will be white, indicating that the upward or downward acceleration is less than 50%.
3. Identifying volatility
You can also use the Parabolic SAR to figure out when the price is beginning to become less volatile. This is important because it can lead to a reversal of the price. You should consider using one of these indicators when you trade: ATR, MFI, RSI, or Bollinger Bands (20,2).
This indicator shows high volatility with white bars and low volatility with black bars. With this knowledge, you can identify whether or not the price is exhibiting an upward or downward acceleration.
Identifying volatility is one of the most important things you can do when it comes to trading. If you are successful in using this indicator, your trade setup will be based on trend and momentum.
4. Identifying market gaps
Again, using the Parabolic SAR, you should see the indicator turn black when there is a gap or gap in your market, either upward or downward. When the signal bars turn black, it is a good indication that the market has entered a gap condition. This can help you identify not only a potential reversal but also whether or not there could be an advancing trend.
Because this indicator will change color to show your market conditions, you can use it to quickly identify patterns such as resistance and support levels. You can also use the indicator to determine whether or not you have enough room for price movement on your trading time frame.
5. Long-term price projection
The Parabolic SAR can also be used long-term. You can see the indicator form a colorful pattern that is similar to a wheatear. The indicator has vertical lines going up and down and crosses at the top, indicating that this market is saying a reversal of the trend is possible.
When you look at the chart, you will see that this trend reversal did not happen immediately. Typically, price action will not turn in your favor until at least 30-60 bars have passed.
With this information, you can make some long-term projections. It may not be a reliable indicator in the short term, but knowing that it has changed to yellow or red can give you some insight into what to expect in the future.
6. Trading with price patterns
If you are trading on an up-trend, you should be looking for Parabolic SAR signals on sideways markets or volatile markets that are starting to trend upward.
The Parabolic SAR may not be the best indicator for high-quality stocks, but it can definitely give you some clues as to what may happen in a market that has been trending upward. Once you have identified one of these patterns, you can start watching the price of these markets to see if they continue their upward trajectory.
7. Using the Parabolic SAR with other indicators
You should also consider how your trading will be affected by using other indicators alongside the Parabolic SAR. Here are a few ideas to get you started:
- When using the Parabolic SAR with the RSI and ATR, you will be able to see your trading signals based on momentum. This is also true when using the Parabolic SAR with MACD.
- You should also consider using many other indicators alongside the Parabolic SAR, including RSI and price channels (20,2). The most effective use of this indicator is when used in conjunction with other indicators.
The Parabolic SAR is a good tool for trend and momentum trading. It can also be used with other indicators to give you an edge in the market.
In conclusion, the Parabolic SAR indicator is a great tool that you can use to identify trends and momentum. However, it’s not the perfect indicator; you will need to learn how to use it to help you improve your trading skills.