Chapter- 8: Parabolic SAR – (PSAR)

What is PSAR?

PSAR is an indicator developed by Welles Wilder, Where P stands for Parabolic & SAR stands for Stop and Reversal. The indicator helps in assessing the direction of the stock’s movement.

How does it work?

The PSAR, or parabolic stop and reverse, is a popular indicator that is mainly used by traders to determine the future short-term momentum of a given asset.

The PSAR indicator forms a parabola composed of small dots that are either above or below the trading price. When the parabola is below the stock price, it acts as a support and trail-stop area, while indicating bullish up-trending price action. When the stock price falls below a single dot, then a stop-loss/sell /sell-short trigger forms.

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 Calculate PSAR in IRIS PLUS?

Open New Chart -> Press “S” -> Select Parabolic SAR -> Click on Parameter -> Enter no. of period -> Click “OK”

Key points to remember:

  • The main advantage of the indicator is that during a strong trend the indicator will highlight that strong trend, keeping the trader in the trending move.
  • The parabolic SAR can be used for setting stop-loss orders. When a stock is rising, move the stop loss to match the parabolic SAR indicator.
  • PSAR sell signal is much more convincing when the price is trading below a long-term moving average.
  • Similarly, PSAR buy signal is effective when the price is trading above a long-term moving average.

The indicator tends to produce good results in a trending environment, but just like many other indicators it also produces false signals and losing trades when the price starts moving sideways.

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