Many traders have a misconception about technical indicators, thinking that the more complex and abstruse the indicator, the more high-end it appears, the more it can demonstrate their superiority, and the closer they can get to the Holy Grail in trading.
However, trading is not that complicated. On the contrary, the more complex the strategy, the more it tends to confuse and distract the trader, hindering execution at every turn.
Therefore, we must constantly remind ourselves that the purpose of trading is not to show off our superiority but to achieve profitability.
So today, I would like to share a very useful indicator with everyone, which is the SAR indicator. This indicator is very simple and easy to use, especially suitable for medium and short-term trading.
Today, I will explain some basic knowledge of SAR, its basic usage methods, and three practical applications.
1. What is the SAR indicator?
In 1978, Welles Wilder JR. introduced the SAR indicator in his book "New Concepts in Technical Trading Systems," originally named the Parabolic indicator.
The English name for the SAR indicator is Stop and Reverse, and SAR is its abbreviation.
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"S" stands for Stop, which is what we commonly refer to as the concept of a stop loss.
"A" stands for Reverse, which refers to a reversal in the market trend.Thus, when these two meanings come together, it refers to the idea that the market trend is about to reverse, and it's time to set stop-loss orders or halt orders to close out positions.
The term "Parabolic Indicator" is more popular among us traders because, on the chart, this indicator is presented in the form of a dotted parabolic curve. When the market reaches the inflection point of the parabolic curve, it is time to turn.
Let's take a look at what this indicator looks like on the chart.
In the first image, you can see the SAR indicator displayed on the MT4 software.
The chart shows a 15-minute candlestick chart of gold, and I have added the SAR indicator to the chart.
You can see in the chart that during a downtrend, a continuous dotted SAR curve forms above the candlestick lines, moving downward; during an uptrend, a continuous dotted SAR curve forms below the candlestick lines, moving upward.
The SAR indicator is somewhat similar to a trendline; in a downtrend, the trendline is above the candlestick lines; in an uptrend, the trendline is below the candlestick lines.
Now, let's look at the second image, which shows the SAR indicator on the Wenhua Financial software.
The chart displays the 2401 contract of urea, and I have included the SAR indicator in the chart.
This indicator looks a bit different on Wenhua Financial compared to MT4; the downward SAR curve is green, and the upward SAR curve is red, making it very easy to distinguish.Comparison of Different Parameters of SAR.
The SAR indicator is also calculated from the price, and the formula for calculation is quite complex. We only need to understand how to use it, and we won't delve into the specific calculation method.
On the chart, for each new candlestick generated, a corresponding SAR indicator point will be added. When the previous candlestick closes, it will automatically generate a point for the next candlestick. However, it is important to note that this point may change. When this point is first produced, it is below the candlestick, and during the fluctuation of the candlestick, this point may move to the upper side, depending on the market volatility.
Thus, conservative trading operations should wait for the closing and then judge based on the position change of the point; aggressive trading can judge based on the position change of the point during the candlestick fluctuation.
The SAR indicator can be adjusted for parameters on the chart, and different parameters will have different performances on the chart.
The chart shows the 15-minute candlestick of gold, and the left and right sides of the chart have exactly the same trend, but the SAR indicator parameters added in the chart are different.
The step size on the left is 0.08, and on the right, it is 0.02 (which is the default parameter of the software).
You can see that the parameter of 0.08 is more aggressive, the calculated points are closer to the candlestick, and the change of the market is faster. On the right side with 0.02, the market change is slower.
The red arrow on the top left from the high point downward shows that the indicator moved below the candlestick at 23:30 on November 9th.
The red arrow on the top right from the high point downward shows that the indicator only moved below the candlestick at 2:15 on November 10th.At the bottom left, the price in 1951 had already generated a reversal signal, with the indicator having shifted below the K-line. On the right side, the indicator remains above the K-line, with no reversal signal generated.
Here, I recommend that everyone use the default indicators provided by the software.
2. Method of using the SAR indicator
I will briefly and concisely explain the use of SAR.
1: When the SAR curve is above the K-line, it indicates a bearish market, and one should sell short. A continuously downward-moving SAR curve indicates that the market remains in a bearish trend, and in trading, one can choose to sell high or firmly hold a short position.
2: When the SAR curve is below the K-line, it indicates a bullish market, and one should buy long. A continuously upward-moving SAR curve indicates that the market remains in a bullish trend, and in trading, one can choose to buy low or firmly hold a long position.
3: Changes in the SAR curve above and below the K-line imply that the market may be shifting from bullish to bearish or vice versa.
On the Wenhua Financial software, it is even simpler; the SAR curve is green when above the K-line, indicating a bearish market, and red when below the K-line, indicating a bullish market.
When the SAR curve changes from green to red, it signifies a shift from bearish to bullish; when it changes from red to green, it signifies a shift from bullish to bearish.
Isn't it super simple? That's why I said this indicator is particularly easy to learn and use. Next, I will explain three practical methods of using SAR.3. Three Practical Methods for SAR Indicator
Method 1: Dual-Cycle SAR Indicator Trading.
Use the SAR indicator on a larger time frame to determine the bullish or bearish trend, and on a smaller time frame, use the SAR indicator's shift from bullish to bearish as a signal to enter trades.
The chart shows the candlestick chart of spot gold, with the left side being the 4-hour candlestick and the right side being the 15-minute candlestick.
The 4-hour level on the left is the primary level for determining the trend, and in the chart on the right, the SAR curve is in a bearish flow, so only short positions are taken and no long positions are made.
Switch to the 15-minute level on the right, and when the market shows a shift from a bullish to a bearish SAR curve, enter a short position, set the stop loss at the previous high point, and hold the position. When the 15-minute SAR curve shows a shift from bearish to bullish, close the position.
After closing the position, wait for opportunities, and when the 15-minute SAR curve shifts from bullish to bearish again, continue to open a short position.
There are three trading opportunities in the chart. The first and third trading opportunities have very small profit spaces, while the second trading opportunity is characterized by a fast and sharp market movement, resulting in a larger profit space.
Here is an interesting technical point to share with everyone.
The three trading opportunities correspond to the three breakouts of the 15-minute 5-wave pattern. The first position is opened on the first wave after the breakout, the second position is taken after the second wave's consolidation, which is the third wave. After the third wave is completed and the position is closed, the market enters the fourth wave consolidation. After the consolidation ends, continue to enter the market, which is on the fifth wave.At the 15-minute level, the SAR curve clearly marks the main upward wave and the consolidation wave, which is where this indicator is particularly useful.
Method 2: Use the changes in the SAR curve for reversal trading.
After the market tests the key support and resistance levels, take advantage of the clear and rapid characteristics of the SAR curve to enter the market for a reversal.
The chart shows a 1-hour candlestick chart of the euro against the US dollar.
The market tested the previous low support at 1.05200 from the position of 1.06720, and after testing in place, observe the SAR indicator. When the indicator shifts from above the candlestick to below the candlestick, forming a change from short to long, enter the market, and set the stop loss at the previous low point.
In this market segment, there are two opportunities to enter. The first order was stopped out, and after the second entry, the market rose significantly.
Method 3: Use the SAR indicator as a basis for adding or reducing positions in trading.
As we mentioned earlier, the SAR indicator can very accurately divide the correction market and the main upward wave, so in trading, we can use this characteristic to perform operations of reducing and increasing positions.
The chart shows a 1-hour candlestick chart of the euro against the US dollar, which is exactly the same as the previous trend.
After the market tested the support order at 1.05200 and moved upward, it tested near the previous high of 1.06720, and the SAR indicator showed a signal of changing from long to short. The SAR curve shifted to above the candlestick, and at this time, reduce the order.Afterwards, the market unfolded a consolidation and fell back. At the low position, the SAR curve showed a signal of switching from bearish to bullish, and this time we added more positions. Subsequently, the market rose again.
The process of the SAR curve switching from bullish to bearish and then back to bullish corresponds to the pattern of a corrective wave.
4. Precautions for using the SAR indicator:
1: In volatile and consolidating markets, the SAR indicator will show frequent signals of switching between bullish and bearish, which can lead to a higher rate of errors. In practice, it should be combined with other indicators or used with other time frames for filtering.
2: Avoid using too aggressive parameters. Aggressive parameters can lead to quick signals of trend changes, which can easily shake out positions during minor pullbacks, making it unfavorable for holding positions to capture larger price movements.
3: The SAR indicator is more suitable for medium-term and short-term trading or swing trading. Because it is quite sensitive, during the holding process, it often generates signals in the opposite direction, which is not suitable for trend-following strategies that aim to let profits run.
4: The SAR indicator is suitable for use in different time frames and can be effectively combined with both large and small time frames for trading.