Right so, I'm a clinical dietitian by day, and a hobbyist trader by night (or during my work day if moons. ). In my attempt to learn the overwhelming amount of charting indicators I figured I would do a write up to share, and also teach myself. Ever hear of the, "see one do one teach one" philosophy? Yeah.. I'm running with that.
Parabolic SAR is a TA tool used with the sole purpose of attempting to predict stops and reversals in a trend making it easier for the trader to close/open positions with profit. SAR literally stands for “Stop and Reverse”. The indicator is shown graphically on the chart with a dot either above or below the current price. These dots will be below the trending line with an upward angle for a bullish signal, or above the trend line with a downward angle indicating a bearish signal. When the price breaks above or below the parabola (indication dots) this signals a possible price reversal. This indicator is a favorite among new traders for its of ease to decipher and use.
The Parabolic SAR can be used effectively for:
• Determining the trend
• Entry and exiting trades
• Trailing stops
This may sound like the golden ticket to effectively trading, but just as with most things this indicator has its limit. The SAR works very well when the crypto is trending (meaning its following a pattern). However if the market is trading sideways (very little lateral movement) it can lead to many false signals which may end in a loss. Trading in a choppy market is never easy, and this indicator on its own may not make it easier.
The image below shows a good example of a sideways market:
(source: http://bit.ly/2sVr5ag)
The second image is an appropriate representation of what a healthy parabolic SAR should look like:
(source: http://bit.ly/2sVr5ag)
At some point you will probably hear someone say, “the price has gone parabolic!” – Why is this an exciting thing and what does it mean? The definition of a parabola is a steep, one directional move. This is generally associated with panic selling/buying. Coupled with the change in price, there is usually a spike in trading volume as well. This will begin to thin out when the price is getting to its peak. In the short term if played right this can lead to significant returns or, significant losses.
There are many reasons why a crypto may go parabolic:
Number One:
Buy the rumor sell the news (meaning, buying the crypto with the assumption the next “announcement” will be big, but selling off prior to it just in case it’s not.
Number Two:
Minor price fluctuations and a downward trend causing people to be afraid of bag holding, and thus the down trend is self-perpetuating. Or on the flip side, a spike in price causing all out FOMO (fear of missing out) and more people buying in.
Number Three:
Lastly, buy and sell stops getting triggered when the trader is AFK. Normally these orders are placed on “support levels” - that causes a cascade effect, which was part of the issue with the GDAX crash.
To summarize: The parabolic SAR is an easy, entry level indicator that is good with actively trending markets. Although I am not the authority on all things trading (far from it) I would not suggest using it as a standalone indicator, as stated above it can be manipulated to give false signals. The SAR is however a good indication of the direction, and duration of a trend.