Parabolic SAR

The parabolic SAR is a technical indicator which is placed on the chart, similar to bollinger bands.  The basic premise used when trading with this indicator is that one should be long when the price is above the indicator while one should sell or short when the price falls below the indicator.  The parabolic SAR is typically used by traders to provide as a trailing stop loss as each successive bar forms. 

This indicator can only be used accurately in highly trending markets, and trades are more prone to success if the trade is taken in the direction of the trend.  However, the parabolic SAR does a poor job of helping investors with a stop strategy during a range bound market.

This speaker uses the parabolic SAR, along with the ADX and RSI to generate solid trading signals.  He looks for a long period of consolidation, coupled with a cross above 20 on the ADX and a move above 50 on the RSI.  Once that happens, he looks for a breakout in price above the consolidation area to get long.  Once the long entry is made, he uses the parabolic SAR to place a trailing stop.

The video is a tutorial on how to use the parabolic SAR to set stop loss orders.  The speaker walks through how to configure this indicator to adapt to price moves in the stock.  There are two inputs used to set the sensitivity to price changes; the acceleration factor and the maximum constant.

The higher the acceleration factor, the more sensitive the indicator will be to price movements in the underlying stock.  Conversely, a lower value on the maximum constant will create a larger gap between the price of the stock and the trailing stop loss as defined by the parabolic SAR line.

The parabolic SAR has three main purposes.  Firstly, it used to help the trader identify the trend.  Secondly, SAR dots help spot trend reversals when they shift in direction.  Finally, they provide a mathematical basis to setting a trailing stop order. 

The speaker suggests that the Parabolic SAR should only be used to set trailing stops in a strongly trending market; otherwise, you may experience whipsaw action.

The speaker covers the technical indicator known as the parabolic SAR.  Similar to the bollinger bands, this indicator is plotted over the price, rather than below it.  The parabolic SAR works well in trending market rather than rangebound ones.  When the indicator is below price, a buy signal is generated with a trailing stop or a stop loss order of some sort.  Conversely, when the indicator is above price, a sell signal is issued.

It is important to note that a trader needs to understand if the market is trending or in a range before applying this indicator.  The parabolic SAR, used with the RSI and the ADX can provide powerful signals.  For example, an ADX reading above 20 and a cross above 50 on the RSI coupled with a price breakout from a longer term rangebound market can signal a buy point.  The parabolic SAR is ideal in this situation as you can use it to place your stop orders as the stock continues to move higher.