Parabolic SAR and Trade Setups


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Video Transcript:

Hello, traders. Welcome to the fifth module of the Advanced Technical Analysis Course: Trending Indicators. In this lesson, we’re going to teach you how to use the parabolic SAR for entries, and how to use it to manage your trade. So let’s start.

What is the parabolic SAR?

Parabolic SAR stands for stop and reverse. This indicator is great to get entries on reversals and to know when to get out before then. This means that we will use this indicator to get reversal entries and we will use it to get out before price reverses on us, if we are already in a trade. This indicator as plotted in your chart as a series of points above and below price. Here’s an example of how the indicator looks in your chart. As you can see here, prices trading below the indicator, so we are in an uptrend, and when price is trading above the indicator, we are in an up move.

Parabolic SAR

And, these moves can be immediate or can be long term, depending on which time frame you are using. And, let me tell you something about the parabolic SAR. You can use it with the same default properties on any time frame. If your style is more of a day trader, you can use it on the five minute chart or on the 50 minute chart; and if you like to trade in for a week for example, you can use it on a four hour chart or the hourly chart.

The systems that we are going to teach you, or the entries, or the set ups that you will be looking for with the parabolic SAR can be used in any time frame. This is the nice thing about this indicator. You can use it no matter what your style is. In a strong up trend, the parabolic SAR will appear above price on a correction. And, in a strong down move, the parabolic SAR will appear below price and corrections. You can see here, we are in an up move, which means the price is trading above the parabolic SAR. But, when price corrects, we will have some dots that will appear above price. But when price breaks above it, it means that we are continuing with the up move.

Now, let’s go to the setup that we are going to be looking at. First of all, the bull set up. We will use support levels in down moves to get the entries for bull setups. When price hits a support level and rejects it, look for a parabolic SAR breakout. This means that price will break above the parabolic SAR and these will give you a stop and reverse signal. Now, here’s an example. We have a down move. We have plotted the parabolic SAR on this chart and as you can see, price hits a massive area of support, and it got rejected by those candles, those long wicks that you can see here. When price breaks above the parabolic SAR and starts sprinting dots below price, it means that we have hit a stop and reverse and now, we have a long entry here.

The stop loss should always be below the previous low in a bull setup, and as you can see here, if you enter right at this candle when price closes above the parabolic SAR, you will get an awesome risk to reward ratio setup. So, this is what we’re looking at when we are, well, this is what we are looking for when we are looking at bottoming trends for long setups.

Now, let’s have a look at the bear setups we are going to be looking at. We will use resistance levels in up moves. This is the exact opposite, actually. When price hits a resistance level and rejects it, look for a parabolic SAR breakout. This means that price will break below the parabolic SAR so that we can confirm a stop and reverse. Also look for the parabolic SAR to start printing dots above price. This is also confirmation that a stop and reverse is in play.

Now, let’s go through an example. As you can see here, we have plotted the parabolic SAR into this chart and price has hit a strong area of resistance, making a double top. Now, when price breaks and closes below the parabolic SAR, we have a short entry right here. Okay? The stop losses should always go above the previous high in a bear setup. This is normal. But, you can see that the risk versus reward in this rate is also amazing.

Parabolic SAR trading example

So these setups that we are going to be looking for with a parabolic SAR are always going to be at serious and conflicted areas. This means that in an up move, we are going to be looking at a trend exhaustion, at a resistance level, and a parabolic SAR breakout, and look for the parabolic SAR to start printing dots above price so that we can confirm the stop and reverse. And on the opposite site, on our bull setup, we are going to be looking for downtrend exhaustions at a support level and a parabolic SAR breakout.

Now, these are just the entries, but we are also going to be using the parabolic SAR to manage our trade. We are going to be trailing our stop with the parabolic SAR. And whether you are in a long or a short position, the system of trailing stops is the same. Once the parabolic SAR has moved beyond your entry point, you start to trail your stops. Okay? The parabolic SAR needs to go beyond your entry point. This is the first rule. In a long position, for example, you will trail your stops to the next parabolic SAR dot to the upside, and in a short position, you will trade your stops to the next parabolic dot to the downside.

Now, here’s an example of a chart. Okay? This is the same example of the short setup that we saw on the last slide. The initial stops are above the previous highs as we already saw. Now, once the parabolic SAR is below our entry, we trail our stops. Remember that our entry is here, at the close of this candle, because this candle, I mean, even though this candle broke with the parabolic SAR, it didn’t close below the parabolic SAR. We need to close below the parabolic SAR for us to get a valid entry.

Now, when the parabolic SAR is below our entry level, which is this dot, we start to trail our stops and we continue to trail our stops until the next dot, until the next dot, until the next dot, until we get stopped out, which is this dot. And as you can see here, we got stopped out before we had the next stop and reverse. So by trailing our stops with the parabolic SAR, we got the best of the move.

Adam

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