The Parabolic SAR (stop and reverse) indicator is a popular technical analysis tool used by traders to determine potential reversals in the market. On BetPro Exchange, Parabolic SAR can be a powerful mechanism for identifying entries and exits. In this comprehensive guide, we’ll explore advanced applications of Parabolic SAR for developing winning trading strategies.
How Parabolic SAR Works
Parabolic SAR stands for “Stop and Reverse” and was developed by J. Welles Wilder Jr. The indicator uses a trailing stop and reverse method to identify trend reversals.
Key Features
- Plots a trail of dots above or below the price bars
- Dots act as trailing stop levels
- Reversal signal when dots flip to opposite side of bars
When the price is trending up, the dots trail below. When a dot appears above, it signals the uptrend may be ending. The opposite applies for downtrends.
Tuning Parabolic SAR for Optimal Performance
Parabolic SAR has two key variables that can be adjusted for sensitivity – the acceleration factor and maximum AF.
Acceleration Factor
The acceleration factor (AF) controls how fast the indicator trails prices. The default is 0.02. Higher AF values create a tighter stop level, while lower values give more room.
Best practices: Start with the default, then increase to 0.03 or 0.04 if getting stopped out too early in trends.
Maximum AF
The maximum AF caps how aggressive the trailing mechanism can become. The default is 0.2.
Best practices: Raise the max AF to 0.25 or 0.3 when trading high volatility assets with momentum. Lower it closer to 0.1 for less volatile trends.
Tuning the acceleration factor and maximum AF optimizes sensitivity
Long Entry and Exit Rules
Parabolic SAR strategies excel at identifying potential long entries and exit points in uptrends.
Entry Rules
Consider entering long when:
- Price hits a swing low
- SAR dot flips below price bars
- An upside breakout occurs
This signals an upside reversal and new uptrend may be starting.
Exit Rules
Possible long exit rules include:
- SAR dot flips above price bars
- A breakpoint in the uptrend occurs
- The rally stalls near a historical resistance area
Short Entry and Exit Strategies
In downtrends, flip the entry and exit rules for short positions:
Entry Rules
Look to go short when:
- Price hits a swing high
- SAR dot flips above price bars
- A downside breakout occurs
Exit Rules
Consider squaring shorts when:
- SAR dot drops below price bars
- An interim low breaks the downtrend
- The decline stalls near historical support
Using Parabolic SAR to Trade Chart Patterns
Parabolic SAR also works well confirming chart pattern breakouts, such as:
- Double tops and bottoms
- Triangles
- Wedges
- Pennants
Plan to enter breakouts in the direction of the SAR trail once pattern support/resistance breaks.
Use SAR flips to trail stops for pattern trades. Exit when dots flip back through key pattern price levels.
Combining Parabolic SAR with Other Indicators
For added confidence, Parabolic SAR can be combined with leading momentum oscillators like:
Moving Average Crossovers
Plot a 20-period and 50-period moving average. Go long when SAR flips bullish and faster MA crosses above slower MA. Sell when SAR flips bearish and faster MA crosses below slower MA.
MACD Crossovers
Take trades in the direction of SAR dots when the MACD line crosses above/below the signal line. This helps time entries with momentum.
RSI Overbought/Oversold
Use SAR to confirm RSI exits its overbought/oversold zone (under 30 / over 70). Enter breakouts when SAR flips bull/bear.
Combining Parabolic SAR with moving averages
Parabolic SAR Trading Strategy Rules
Here are the complete rules for a momentum-based Parabolic SAR breakout strategy:
Entry Rules
Go long when:
- SAR flips bullish below price
- 20-period MA crosses above 50-period MA
- MACD line crosses above signal line
Go short when:
- SAR flips bearish above price
- 20-period MA crosses below 50-period MA
- MACD line crosses below signal line
Exit Rules
Close longs when:
- SAR dots flip bearish
- The rally peaks and prices turn lower
- MACD histogram bars turn negative
Close shorts when:
- SAR flips bullish
- The decline stalls and prices turn higher
- MACD histogram bars turn positive
Optimizing Parabolic SAR Strategies
Follow these tips to improve performance of Parabolic SAR trading strategies:
- Tune the acceleration and max AF for market volatility
- Combine with other indicators for confirmation
- Use proper risk management with stop losses
- Trail stops with SAR flip levels
- Adjust strategy rules and settings as market conditions change
With optimization, Parabolic SAR strategies can achieve win rates over 65%.
Case Study: Trading Bitcoin with Parabolic SAR System
Bitcoin provides an interesting case study for applying Parabolic SAR strategies to a fast-moving, volatile asset.
When tuned properly, Parabolic SAR serves as an adaptive trailing stop – allowing enough room for trends capture large gains.
Let’s walk through an example Bitcoin long trade:
Entered long on bullish SAR signal after swing low
Price hits a swing low around $9200 and SAR dot flips bullish underneath the price bars.
We go long Bitcoin per strategy rules on signal confirmation. A rally begins and SAR trail stop moves up steadily under the rising prices.
Over the next few weeks, Bitcoin climbs over 60% to around $15,000. As the advance accelerates, SAR sensitivity increases with a higher AF to trail the uptrend.
Finally, the rally stalls, SAR flips bearish, and we exit around $14,800 for a $5,600 per BTC gain.
By allowing room for the trend to develop using SAR settings, the trade captures a large upside price move.
The Bottom Line
Parabolic SAR is best suited for trading securities with momentum that trend nicely. With careful tuning and optimization, SAR can deliver high-probability signals for entering and exiting trades.
Combining SAR indicators with other confirmation tools creates robust breakout and reversal strategies. Sticking to sound risk management also improves results.
While not perfect, Parabolic SAR remains a quick, visually-appealing indicator for manually spotting potential trend reversals on charts across all markets and time frames.
Frequently Asked Questions
Q: What markets can I trade with Parabolic SAR strategies?
A: Parabolic SAR works on all liquid markets including forex, stocks, futures, and cryptocurrencies. It can be applied to any timeframe from 1-minute charts up to daily.
Q: Do I need to optimize SAR settings for each market?
A: Tuning the acceleration factor and maximum AF for specific trading instruments is recommended. Each market has different volatility characteristics.
Q: Can SAR signals be automated or coded into EA’s?
A: Yes, the formulas and logic of Parabolic SAR make it easy to automate signals for mechanical trading systems or expert advisors (EA’s).
Q: Does Parabolic SAR work better with other indicators?
A: Using SAR in combination with confirmatory indicators like MACD, RSI, or moving averages creates more robust strategies with fewer false signals.
Q: Is Parabolic SAR meant for trend trading or reversals?
A: Primarily for reversals to enter new trends early. However, SAR trail stops also make it useful for trailing exits in existing trends. So both reversing and trend trading.