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What Is the Parabolic SAR Indicator and How Does It Work

11 Oct 2023

Are you an investor in the Indian stock market looking to enhance your trading strategy? If so, you may want to consider adding the Parabolic SAR (Stop and Reverse) indicator to your toolbox. So, let's explore what the Parabolic SAR indicator is and how it can work to your advantage in the Indian stock market.

The Parabolic SAR refers to a technical indicator used to identify potential trend reversals and set trailing stop-loss levels. Developed by J. Welles Wilder Jr., it's particularly popular among traders in the Indian stock market due to its simplicity and effectiveness.

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How does the Parabolic SAR Indicator work?

​The steps involved while using the Parabolic SAR Indicator are: ​​​

  • Understanding SAR Values: 

SAR values appear as dots either above or below the price chart. When below, they suggest a bullish trend, and when above, a bearish trend. These dots move in proximity to the price, and their distance determines the strength of the trend.

  • Initiating a Buy Signal: 

When the SAR dots transition from above to below the price, it generates a buy signal. This indicates a shift from a bearish trend to a bullish one, making it a potential entry point for traders.

  • Generating a Sell Signal: 

Conversely, when the SAR dots transition from below to above the price, a sell signal is generated. This signifies a shift from a bullish trend to a bearish one, suggesting it may be time to exit a position.

  • Setting Stop-Loss Orders: 

The Parabolic SAR also aids in setting trailing stop-loss orders. As the dots move, they create a dynamic stop-loss level, allowing traders to lock in profits and limit potential losses.

What are the advantages of using Parabolic SAR?

  • Simplicity: 

Even novice traders can easily grasp and apply the Parabolic SAR indicator due to its straightforward signals.

  • Trend Identification: 

It excels at identifying trends and helping traders stay on the right side of the market.

  • Trailing Stops: 

The dynamic trailing stop-loss feature helps secure profits while allowing room for potential gains.

  • Versatility: 

The Parabolic SAR can be used with various trading styles and timeframes, making it adaptable to different market conditions.

What are the risks of using the Parabolic SAR Indicator?

  • In sideways markets, the Parabolic SAR may generate false signals. 
  • Some Indian stocks may not exhibit clear trends, making it less effective in some situations. 
  • Combine Parabolic SAR with other technical indicators and fundamental analysis.

Closing Thoughts

The Parabolic SAR indicator is a valuable tool for traders as it aids in identifying trends and determining trailing stop-loss levels. Use it in conjunction with other tools for a well-rounded trading strategy. Incorporating the Parabolic SAR can help both beginner and experienced traders navigate the dynamic world of the Indian stock market more effectively.

 

Related Articles:  Beginners Guide on Illiquid Stocks | A Complete Guide on Forfeited Share | Relative Strength vs. RSI

 

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