How to read Parabolic Stop and Reverse (SAR) indicator?
What is Parabolic Stop and Reverse?
The original name of the SAR is Stop and Reverse, which means the turning point at which the stock price should be bought or sold. The SAR uses a trailing stop level that follows prices as they move up or down. The stop level increases speed based on an "Acceleration Factor."
The parabolic function accepts three parameters. The first two control the acceleration during up and down moves, respectively. The last parameter determines the maximum acceleration. it is often used as trend indicator.
How does SAR indicator works?
The indicator is usually shown as a series of dots above or below the price bars.
When the stock price bars is above the SAR dots, it is a long market, you should buy
When the stock price bars is below the SAR dots, it is a short market, you should sell
The Parabolic SAR trading system uses the parabolic level as a “stop and reverse” point, calculating the stop for each upcoming period.
When the stop is hit you close the current trade and initiate a new trade in the opposite direction. This system keeps you invested in the market at all times.
The Parabolic SAR excels in fast-moving trends that accelerate as they progress. The stops are also calculated to accelerate; hence you need to have the correct "Acceleration Factor" to match the market you are trading. Up and down acceleration parameters may be different.
The Parabolic SAR may cause whipsaws during sideways or trend-less markets, in this case, in order to find out whether there is trend, you need to take a look at other indicators such as EMA, MACD
Case Study: Twitter Stock prediction after Elon Musk's takeover bid
On April 14th, 2022, Elon Musk, Twitter’s largest shareholder, has launched a takeover bid for the social media company, offering to buy it for $54.20 a share and take it private
Below is Twitter Stock Chart exctracted from moomoo app
From above twitter stock bar chart and SAR dots chart, we can find out that since mid March, Twitter stock bar is above SAR dots, this indicates that it is long market, investors should buy Twitter stock,
if you trace back, twitter stock bar was below SAR dots since August 2022, which indicated twitter stock was in short market, investors should sell.
After done research on SAR, you should do further research using MACD and EMA indicators, the above chart is Twitter stock with MACD, EMA, SAR indicators, all three indicators indicates that Twitter stock could be on up trend, a long market, although DIF and DEA both are negative number, the trend of bullish market is weak.