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What Is the Parabolic SAR Indicator?

Parabolic SAR (PSAR) is a technical indicator created by J. Welles Wilder. In 1978, Wilder released a book titled New Concepts in Technical Trading Systems. The book became an instant classic among stock and commodity traders. It became the ‘holy grail’ of technical analysis.

Wilder introduced the Parabolic SAR indicator in his book. The indicator quickly evolved into one of the most widely used trading tools within the speculative trading community.

PSAR System

In its basic format, PSAR is a system designed to forecast reversals in the overall trend of the market. The system is constantly in the market, either long or short. It is never flat or neutral. Based on the fact that PSAR always maintains a long or short position, the system produces many losing trades.

PSAR works best when the underlying market moves in the same direction for an extended period of time. The system will keep the trader on the right side of the market throughout the move.

Unfortunately, speculative markets rarely move in the same direction for long periods. Trading activity is usually very choppy with several false starts along the way. This explains why PSAR experiences a large number of losing trades.

Benefits of PSAR

Even though PSAR produces a large number of false breakouts, the indicator remains quite popular among active traders. Traders are willing to tolerate the losing trades because the system works incredibly well at capturing large gains. For example, if a particular market moves in the same direction for an extended period of time, PSAR will capture the majority of the move.

Brief Summary of the Parabolic SAR Indicator

  • Parabolic SAR (PSAR) indicator was created by J. Welles Wilder.
  • PSAR is designed to forecast reversals in the overall trend of the market.
  • The system is constantly in the market, either long or short.
  • It is never flat or neutral.
  • PSAR works best when the underlying market is trending in the same direction.
  • PSAR will keep the trader on the right side of the market.
  • Speculative markets rarely move in the same direction for an extended period of time, which means that the system produces many losing trades.
  • Despite its low winning percentage, PSAR remains very popular among traders.
  • PSAR is quite successful at capturing big gains, which explains why the system remains so popular.
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