Parabolic SAR Indicator
- Parabolic SAR is a technical indicator used to analyse the stock market. It is used by traders to identify the trend direction as well as trend reversal points.
- SAR stands for stop and reverse, used to identify the entry and exit points. Parabolic SAR indicator appears on the chart in the form of circles either above or below the price, based on the trend direction. The dots appear below the price if there is an upward trend and above the price if there is a downward trend.
- A change in the position of dots indicates a trend reversal, i.e., if the dots are above the price, when they appear downwards, it might indicate a trend reversal from a bearish rally to a bullish rally and the price might rise further.
- Similarly, if the dots appear below the price and when they appear upwards, it indicates a trend reversal from a bullish rally to a bearish rally and the price might continue to fall.
This is the 1 day chart of Maruti Suzuki India around Jan-Aug, 2020
- The dots appear closer at the start of the trend. As the trend accelerates, the gap between the dots increases because the dots need to catch up with the accelerating price level and the SAR appears to move faster as the trend develops.
- Traders can enter the trade using the SAR indicator. If the dots appear above the price level and the gap between the dots is increasing, it indicates a strong bearish rally and traders can initiate their short positions.
- Similarly, if the dots appear below the price level and the gap between the dots is increasing, it indicates a strong bullish rally and traders can initiate their long positions.
- SAR indicator is also used to set the stop loss order. Traders can place the stop loss order and move it as the SAR indicator moves.
- The main disadvantage of this indicator is it might lead to false results when the price moves in the horizontal direction, i.e., if the price moves sideways, the SAR indicator keeps fluctuating above and below the price level and the traders might incur losses.
- Hence, SAR indicator must be used along with a few other indicators, like ADX indicator, to better analyse the market.