TradingView - Parabolic SAR

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  1. TradingView - Parabolic SAR

The Parabolic SAR (Stop and Reverse) is a technical indicator used to identify potential trend reversals and generate trading signals. Developed by J. Welles Wilder Jr., the creator of other popular indicators like the Relative Strength Index (RSI) and the Average True Range (ATR), the Parabolic SAR is designed to be used in conjunction with existing trend-following strategies. This article provides a comprehensive guide to understanding and utilizing the Parabolic SAR indicator within the TradingView platform, geared towards beginners.

    1. Understanding the Basics

The Parabolic SAR is displayed as a series of dots either above or below the price chart. These dots represent potential stop-and-reverse levels. The core idea behind the indicator is that in a strong trend, the SAR will remain on one side of the price action, consistently moving closer to the price. When the price reverses and crosses the SAR dots, it signals a potential trend reversal.

      1. How it Works: The Formula

The calculation of the Parabolic SAR involves several components. While TradingView automatically handles these calculations, understanding the underlying formula provides a deeper appreciation of the indicator's mechanics.

  • **EP (Extreme Point):** This is the highest high over the preceding 'n' periods (typically 14 periods for initial calculation). For an uptrend, the EP is the highest high. For a downtrend, it’s the lowest low.
  • **AF (Acceleration Factor):** This factor accelerates the SAR’s movement as the trend progresses. It starts at a low value (typically 0.02) and increases with each new high (in an uptrend) or low (in a downtrend), up to a maximum value (typically 0.20).
  • **SAR (Stop and Reverse):** This is the actual SAR value plotted on the chart. The formula differs based on the trend:
   * **Uptrend:** SARt+1 = SARt + AF * (EP - SARt)
   * **Downtrend:** SARt+1 = SARt - AF * (EP - SARt)

Let’s break that down:

  • **SARt+1** is the SAR value for the next period.
  • **SARt** is the current SAR value.
  • **AF** is the acceleration factor.
  • **EP** is the extreme point.

The initial SAR value is usually set to the closing price of the first period. As the trend develops, the AF increases, causing the SAR to move closer to the price more rapidly. This acceleration is intended to capture profits quickly and minimize losses.

    1. Using the Parabolic SAR in TradingView

TradingView offers a user-friendly interface for applying and customizing the Parabolic SAR indicator. Here's how to get started:

1. **Accessing the Indicator:** Open any chart in TradingView and click on "Indicators" at the top of the screen. 2. **Searching for Parabolic SAR:** Type "Parabolic SAR" in the search bar and select the indicator from the results. 3. **Customization:** Once added, the indicator's settings can be adjusted by clicking on the "Settings" (gear icon) next to the indicator's name in the chart.

      1. Key Settings to Consider
  • **Step (Acceleration Factor):** This is the AF mentioned earlier. The default value is 0.02. Higher values make the SAR more sensitive to price changes, potentially generating more signals, but also increasing the risk of false signals. Lower values make the SAR less sensitive. Experimentation with this setting is crucial. [Trend Following] strategies often benefit from adjusting this value.
  • **Maximum:** This sets the upper limit for the AF. The default is 0.20. Increasing this value allows the SAR to accelerate more rapidly, while decreasing it slows down the acceleration. Consider the Volatility of the asset when setting this value.
  • **Initial Step:** This determines the initial acceleration factor.
  • **Reversal:** This setting controls how the indicator switches from uptrend to downtrend and vice versa.
    1. Interpreting the Signals

The Parabolic SAR generates two primary types of trading signals:

  • **Buy Signal:** A buy signal is generated when the price crosses *above* the SAR dots. This suggests that the previous downtrend may be reversing, and an uptrend is beginning. Traders often look for confirmation from other indicators like the Moving Average Convergence Divergence (MACD) before entering a long position.
  • **Sell Signal:** A sell signal is generated when the price crosses *below* the SAR dots. This suggests that the previous uptrend may be reversing, and a downtrend is beginning. Similar to buy signals, confirmation with other indicators like Stochastic Oscillator is recommended.
      1. Identifying Trends

The position of the SAR dots relative to the price can also help identify the current trend:

  • **Dots Below Price:** Indicates an uptrend. As the uptrend continues, the SAR dots will move closer to the price.
  • **Dots Above Price:** Indicates a downtrend. As the downtrend continues, the SAR dots will move closer to the price.
  • **SAR Flipping:** When the dots switch from one side of the price to the other, it signals a potential trend reversal. This is the core signal of the indicator. This is often associated with [Swing Trading] techniques.
    1. Combining Parabolic SAR with Other Indicators

The Parabolic SAR is most effective when used in conjunction with other technical indicators and analysis techniques. Here are some common combinations:

  • **Parabolic SAR + Moving Averages:** Using the SAR to confirm signals generated by moving averages can improve accuracy. For example, a buy signal from the SAR coinciding with a golden cross (50-day MA crossing above the 200-day MA) could be a strong indication of an uptrend.
  • **Parabolic SAR + RSI:** Combining the SAR with the RSI can help filter out false signals. A buy signal from the SAR combined with an RSI reading below 30 (oversold) could be a good entry point. [Momentum Trading] strategies often use this combination.
  • **Parabolic SAR + Volume:** Analyzing volume alongside the SAR signals can provide further confirmation. Increasing volume during a SAR reversal can strengthen the signal.
  • **Parabolic SAR + Fibonacci Retracements:** Using Fibonacci levels to identify potential support and resistance zones, and then using the SAR to confirm entry points within those zones can refine trading setups. [Fibonacci Trading] is a popular technique.
  • **Parabolic SAR + Candlestick Patterns:** Confirming SAR signals with bullish or bearish candlestick patterns can increase the probability of a successful trade. Understanding [Japanese Candlesticks] is beneficial.
    1. Limitations of the Parabolic SAR

While a valuable tool, the Parabolic SAR has limitations:

  • **Whipsaws in Sideways Markets:** The SAR can generate numerous false signals (whipsaws) in sideways or choppy markets. This is because the indicator is designed to identify trends, and it struggles in the absence of a clear trend.
  • **Lagging Indicator:** Like most trend-following indicators, the Parabolic SAR is a lagging indicator. This means it generates signals after the price has already moved, potentially leading to missed opportunities or reduced profits.
  • **Sensitivity to Settings:** The performance of the SAR is highly sensitive to the chosen settings (Step and Maximum). Finding the optimal settings for a specific asset and timeframe requires experimentation and backtesting.
  • **Not a Standalone System:** The indicator should *never* be used as a standalone trading system. It’s best used as a confirming tool alongside other indicators and analysis techniques. [Day Trading] often requires a combination of multiple indicators.
    1. Backtesting and Optimization

Before implementing the Parabolic SAR in live trading, it is crucial to backtest its performance on historical data. TradingView provides tools for backtesting strategies, allowing you to evaluate the indicator's effectiveness under different market conditions.

  • **TradingView Pine Script:** TradingView’s Pine Script language allows you to create custom strategies based on the Parabolic SAR and backtest them automatically.
  • **Parameter Optimization:** Backtesting can help you optimize the SAR settings (Step and Maximum) for a specific asset and timeframe.
  • **Risk Management:** Always incorporate proper risk management techniques, such as stop-loss orders, when trading based on the Parabolic SAR signals. [Risk Management] is paramount in successful trading.
    1. Advanced Considerations
  • **Multiple Timeframe Analysis:** Analyzing the Parabolic SAR on multiple timeframes can provide a more comprehensive view of the market. For example, a buy signal on a daily chart combined with a buy signal on a 4-hour chart could be a stronger indication of an uptrend.
  • **Dynamic Settings:** Consider adjusting the SAR settings dynamically based on market volatility. For example, increasing the Step value during periods of high volatility and decreasing it during periods of low volatility.
  • **SAR Trailing Stop:** The Parabolic SAR can be used as a trailing stop-loss order. As the price moves in your favor, the SAR dots will move closer to the price, providing a dynamic stop-loss level that locks in profits.
    1. Resources and Further Learning
  • **TradingView Help Center:** [1](https://www.tradingview.com/support/solutions/articles/1000239476-parabolic-sar)
  • **Investopedia - Parabolic SAR:** [2](https://www.investopedia.com/terms/p/parabolicsar.asp)
  • **School of Pipsology - Parabolic SAR:** [3](https://www.babypips.com/learn/forex/parabolic-sar)
  • **Technical Analysis Books:** Explore books on technical analysis by authors like John J. Murphy and Martin Pring.
  • **Online Trading Courses:** Consider taking online courses on technical analysis and trading strategies. [Algorithmic Trading] is becoming increasingly popular.
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