In the majority of crypto trading situations, traders often misunderstand signals provided by trading indicators. When an indicator is simple and easy-to-use, the chances of this misunderstanding increase. When asked to name such a simple yet confusing indicator, the first name that comes to mind is the Parabolic SAR. It is certainly one of the most misunderstood indicators. Let’s take a closer look at this indicator to ensure that you no longer misinterpret its signals.
1. Parabolic SAR: A Simple Definition
The Parabolic SAR, or Parabolic Stop and Reverse, developed by J. Welles Wilder, the creator of popular indicator RSI, is a powerful trend-following indicator. It helps traders predict when trends might change from up to down or vice versa. It is shown as dots below price bars in an uptrend and above them in a downtrend.
1.1. Prime Functions of Parabolic SAR
The primary functions of the Parabolic SAR are:
- To indicate trend direction by dots above or below price bars
- To signal potential entry points
- To signal potential exit points
2. How to Calculate Parabolic SAR
Time to move to the calculation part. We have two different calculations for uptrend and downtrend.
| In an uptrend SARn+1 = SARn + AF * (EP – SARn) In A downtrend SARn+1 = SARn – AF * (SARn – EP) |
| SARn+1:- is the next period’s SAR value SARn:- is the current period’s SAR value AF:- represents the acceleration factor EP:- is the extreme point |
The acceleration factor (AF) adjusts the rate at which the SAR moves, making it speed up as the trend continues. The extreme points (EP) represents the highest or lowest price during the current trend. This calculation helps determine the SAR values in different market conditions.
Let’s dive deep into the calculations
To calculate the next SAR value (SARn+1), you start with the current SAR value (SARn). You then add the product of the acceleration factor (AF) and the difference between the extreme point (EP) and the current SAR value (SARn).
To calculate the next SAR value (SARn+1), you start with the current SAR value (SARn). You subtract the product of the acceleration factor (AF) and the difference between the current SAR value (SARn) and the extreme point (EP).
In simpler terms, if the market is going up, you calculate the next SAR by adding a portion of the distance between the extreme point and the current SAR to the current SAR. If the market is going down, you calculate the next SAR by subtracting that portion of the distance from the current SAR.
3. Steps to Launch Parabolic SAR on a TradingView Chart
Here is a step-by-step guide to how to launch the Parabolic SAR indicator on a TradingView chart:
- Step 1: Sign in to TradingView
Start by logging into your TradingView account. If you don’t have an account, you will need to sign up.
- Step 2: Search for Your Preferred Chart
After logging in, you will see a search bar at the top of the TradingView platform. Type in the name of the asset you want to analyse, like “Bitcoin/TetherUS”.
Select your preferred chart from the search results by clicking on it. This will open the chart for that asset.
- Step 3: Add the Parabolic SAR Indicator
Once you have your chart open, you will need to add the Parabolic SAR indicator. To do this, look for the ‘Indicators’ button, which is usually located at the top-left corner of the screen, and click on it.
In the search bar within the Indicators menu, type ‘Parabolic SAR’, to find the indicator you want.
- Step 4: Select the Parabolic SAR indicator
When the Parabolic SAR indicator appears in the search results, click on it. This will add the indicator to your chart.
- Step 5: Configure the Settings
The Parabolic SAR indicator may have default settings, but you can configure them if you wish. To do this, click on the indicator on your chart, and you will see a settings icon. You can adjust parameters like start, increment and max value. But, if you are new to using this indicator, best to keep the settings unchanged.
- Step 6: Use the Indicator to Analyse
Once the Parabolic SAR indicator is added and configured, it will display on your chart, often as dots or points above or below the price bars. These points will help you make your analysis.
4. Reading Parabolic SAR: Basic Signals
The Parabolic SAR indicator primarily provides two signals:
- Uptrend/Downtrend Signal
The indicator indicates the direction of the price trend. Dots below the candles suggest an uptrend, while dots above indicate a downtrend.
The distance between the dots and the candles reveals how strong the trend is. Dots far from candles indicate a robust trend, while closer dots suggest a weaker one.
5. Common Strategies Using Parabolic SAR
Here are the common strategies used by crypto trading, using Parabolic SAR.
Crypto traders enter long positions when the dots switch below the candle (uptrend signal). Short positions are taken when the dots switch above the candle (downtrend signal).
Place a stop loss at the Parabolic SAR itself for risk management. Set the exit point at 1.5 times your stop loss. Adjust the stop loss if the Parabolic SAR dots are too for, according to your risk tolerance.
6. Parabolic SAR Divergence
Parabolic SAR Divergence occurs when the price moves in the opposite direction of the indicator. This can signal a potential trend opportunity.
For instance, when Parabolic SAR is heading down and the price is moving up, it creates a bullish divergence, suggesting a continuation of the upward trend.
On the flip side, when the indicator is moving up and the price is heading in a downward direction, it creates a bearish divergence, indicating a possible continuation of a downward trend.
7. Endnote
The Parabolic SARis a valuable tool for cryptocurrency traders, providing clear signals about trend direction and strength. Its user-friendly nature makes it accessible to both new and experienced traders. However, it is essential to remember that it also has limitations. It may produce false signals in ranging or volatile markets. So, it is better to be used in conjunction with other analyses for accurate decision-making.