Parabolic Stop and Reverse, A Tool for Active Traders

Parabolic Stop and Reverse, A Tool for Active Traders: Parabolic Stop and Reverse is a technical analysis tool that many active traders will find useful. It is the favorite of futures traders who always want to have an open trade.

PSAR, Stop and Parabolic Reverse is one of the most complex indicators. Initially it was intended for use in the futures markets, but like most trading tools, it is applicable to any form of trading with a price chart. The current use were risk positions. Some futures traders, whose job is to physically buy and sell commodities, not speculators, need to have an open position at all times to weather future price fluctuations. In the case of these professionals, when a bullish position is closed, a bearish position must be open, and vice versa. The problem lies in when to open and close such positions, and can be resolved, at least in theory, with the help of the PSAR.

The indicator was developed by J. Welles Wilder jr. and uses the stock price as time decays in the equation. It is shown as a point above or below each period of the stock price and is used as support/resistance targets and as input/output signals.

A futures trader follows the signals this way: when points are below the candles, long positions are opened. When the price moves below one point and the trend is reversed, investors consider opening short positions. Each time a point changes sides, a new position is opened. In the case of option, forex or CFD bettors, a position could be opened with each change, even though this is not always the best approach. Many times a lot of shifts have already occurred, especially if you are using a short interval of time, so waiting for withdrawals or for the ups to end, and testing support or resistance is a good idea. The objectives of these supports/resistances are the PSAR.

The initiator, like all others, is cold and calculating, and provides both upward and downward signals in any market. That’s why additional analysis is needed to rule out false signals or less likely trading signals. In this example, a multiple time interval approach to PSAR might work, some traders prefer to add stochastic to the mix.

In this case, we will use the daily price chart and the PSAR to set the direction of today’s trades, and then move down to an hourly or 30-minute chart, and look for input signals. On the top chart it can be seen that the Litecoin is being bought above its point, which makes today’s trend bullish. In addition, the current candle has already moved down to test the support and confirmed it. We then move the hours chart and wait for input signals that call for long positions to be bought or opened.

The bottom chart shows an asset that is already in bullish mode, having bounced off the support. This move is confirmed by an entry signal on the stochastic that follows the upside and moves towards the upper signal line.

At this point you must wait for the next stochastic signal because there is already one in play, and the entry here is questionable. The next stochastic signal would be an upward cross or any %K dive to try/bounce from %D. Bullish crosses include %D crossing the top signal line or %K diving below and then crossing back above %D. The signal duration could be as short as 1 hour or as long as several days, depending on market conditions.

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