Many strategies and tactics are used in trading. While some might be more effective than others for certain traders, it’s important to learn all of the strategies so you have a better chance of “cracking the code” and achieving success as a trader.
With that in mind, we’re going to focus this article on the parabolic sar trading strategy and how it’s used in trading.
What is the parabolic SAR?
In a nutshell, the parabolic SAR can help traders determine when the current trend is going to end or is about to end. It does this by placing dots above or below the price on a chart based on the trend. A dot is placed above the price when the trend is downward and below when it’s upward.
According to The Balance, “The parabolic SAR (PSAR) indicator uses the most recent extreme (highest and lowest) price (EP), along with an acceleration factor (AF), to determine where the indicator dots will appear.”
The parabolic SAR is calculated as follows:
- Uptrend: PSAR = Prior PSAR + Prior AF (Prior EP – Prior PSAR)
- Downtrend: PSAR = Prior PSAR – Prior AF (Prior PSAR – Prior EP)
- EP = Highest high for an uptrend, and lowest low for a downtrend updated each time a new EP is reached.
- AF = Default of 0.02, increasing by 0.02 each time a new EP is reached, with a maximum of 0.20.
How to use this strategy for trading?
So how do you actually use the parabolic SAR to your advantage?
When the dot is placed above the price, you sell. When the dot is placed below the price, you buy.
However, sideways market conditions make it tougher to spot a trend and the indicator could move back and forth, resulting in less insight and a trader losing money because no true trend is present.
That’s the basic strategy behind this trading tool. Ideally, you continue to follow this strategy and make money over a long period of time. However, it’s, of course, important to point out that the stock market might show trends over short and long periods of time, but that doesn’t mean those trends will continue — the market can fluctuate up or down at any given time.
That’s why it’s important to learn multiple strategies and everything you can about the market before you take investing and trading seriously.
Forbes points out five steps to start trading stocks and they’re invaluable to new traders: Get your priorities straight, build some knowledge, pick a broker, take it slow, and make a plan for when things go south.
It’s also important to not make this an emotional roller coaster ride, because that could lead to uneducated and uninformed decisions, resulting in a loss of money.
While the parabolic SAR can help you decide when to buy and sell stock, it doesn’t have to be the only indicator you follow, let alone the only strategy in trading. There are many different strategies out there as well as ways to look at the market. For example, four common strategies among day traders, according to U.S. News, are momentum trading, scalping, swing trading, and market-neutral trading.
The point is that you have an endless amount of knowledge to learn in stocks. But we hope you have a better understanding of the parabolic SAR and how it’s used in trading.