Parabolic SAR Indicator Explained Simply and Understandably -- with David Moadel
hello friends and welcome to looking at the markets with David Modell today
we're going to talk about the parabolic SAR indicator invented by this man J
Wells Wilder who also brought us the RSI and the Average True Range all right so
let's take a look at stockcharts.com this is for swing trading this is a
daily candlestick chart of Apple stock later in this video we'll look at it
from the perspective of a day trader but for now we'll stick with swing trading
right now and notice that the parabolic SAR is a bunch of dots it's kind of
unusual looking all right and sometimes the candles are above the dots and
that's when the trend is upward that's bullish price action so when the
candles are above the dots right below them then you want to be going along
alright and then when the trend reverses when the candles start to go down then
you'll see that the candles are below the dots and that's bearish price action
the trend is downward and you want to get out of the stock at that point so
it's pretty simple okay so when the candles are above the dots you can take
a long position if you want to you can buy it and then as soon as the suddenly
the candles are below the dots you can get out all right take your profits so
if you kind of get a trailing stop loss effect here because notice that the dots
move with the candles the the dots the indicator it moves with the stock price
much like a trailing stop loss does so you can enjoy the ride up until the
trend turns downward when the price action gets ugly or the trend is down
then it takes you out again much like a trailing stop loss alright also what's
cool about this indicator you notice that a lot of indicators will be right
on top of the candles all the time and that's no fun right like moving averages
sometimes are right on top of the candlesticks and you can't see what's
what alright it's kind of annoying notice that the parabolic SAR dots are
never right on top of the candles right there not right in the middle the
price action there it's separated from it there you get some space some
breathing room between the indicator and the candles themselves and if you're
wondering when it decides to reverse well notice that let's take a look at
these candles right okay so these candles are below the dots and so here
it's bearish okay because you have a downward trend
you have bearish price action so it's below the dots and so you're not buying
the stock here you're staying out you could even go short if you want to but
for those who only go long who you know buy stocks and don't short them which is
a safer way to go especially for Apple which tends upward right tends to go
upward most of the time or a lot of the time so okay so here your candles are
below the dots okay that's bearish you want to stay out and then as soon as the
candles hit the dots above them what does that mean that means the trend is
upwards now so it hits the dots above them and look what happens to the dots
suddenly they shift all the way down here now the dots are below candles are
above you get in right here right okay so it's going upward it's trending
upward everything's great and then oh it trends downward right it's the beginning
of a downtrend here and as soon as the candle hits those dots below them guess
what happens to the dots this shift they shift to being above the candles now and
so you get out bearish price action downward trend you want to get out okay
so whenever the candles hit the dots either above or below then the dots
shift position above or below and because that's a trend change it's
signaling a trend change now the parabolic SAR indicator works best when
it's trending which Apple is on this chart for sure you could have done
pretty well with it you could have enjoyed a lot of rides up and you could
have avoided a lot of the waterfalls as I call them the the downward price
action alright because it would have taken you out kind of like a trailing
stop loss once again it would have treated taking you out as soon as the
trend or direction changed when it's no fun when it doesn't work too well is
during sideways price action because is then you are getting out and getting
in you're getting out you're getting in getting out all right buying selling
buying selling running up a lot of Commission costs unless you're using
Robin Hood or something like that or alpha investing or one of those you know
a fee free Commission free apps or something like that then you could avoid
the Commission costs but even then you have the frustration of getting out
getting in getting out getting in alright so when it's not a trending
market when it's a sideways drifty choppy kind of market it doesn't work
too well alright when it's trending it's fantastic look at that right up there
okay what made some nice profits there so you can use it with another indicator
that tells you when the market is or when the stock is trending and when it's
not trending something like that okay and there are indicators that do that
but if you have a trending market this works pretty well I would say all right
so that's for swing trading you can use it here's trading view calm this is a
good website with charts for day traders and swing traders do alright and notice
that again this is Apple stock it's a five-minute chart which is pretty good
for day traders and again you know we can see that you can ride it up okay and
so what happens well when the stock okay it's trending down so it's below the
dots and so you're staying out you know you're not buying the stock now but then
when the candle hits the dots what happens to the dots they shift to the
other position right below the candles now and you you can get in write it all
the way up and then oh the candles have switched directions they hit the dots
below them and so the dots shift to being above the candles and that's
bearish price action it takes you out right about here so that's an example
all right but again when you have that sideways action you're in you're out
you're in you're out you're frustrated no fun okay so only really best for
trending markets still a pretty good indicator overall but if you can use it
with another indicator that tells you when the market is trending or when it's
just drifting and sideways that can help you a lot
all right and I have videos on a lot of indicators and I'm gonna put this in a
playlist on YouTube with all not every indicator but practically almost all
right so I hope you enjoyed this video if you liked it please give it a thumbs
up on YouTube and leave a comment do you like the parabolic SAR indicator
have you tried it did you like it what is it useful for you and subscribe
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like this one and if you'd like some help with trading or investing you can
email me anytime my email address is down below it's David Modell at
gmail.com thank you so much I really appreciate it and I'll talk to you again
soon