PSAR (Parabolic SAR)
A trend-following indicator that highlights potential reversal points and helps set dynamic trailing stops for risk management
Technical Overview
Parabolic SAR (Stop and Reverse) is a trend-following indicator developed by J. Welles Wilder Jr. that helps traders identify potential trend reversals and set dynamic trailing stops. The PSAR appears as a series of dots above or below price, switching position when the trend direction changes.
Key Insight: PSAR is most effective in trending markets, providing clear entry and exit signals. In sideways or choppy markets, it can generate false signals, so it’s best used in combination with other indicators.
How PSAR Works
What Parabolic SAR Actually Does
Think of PSAR as a “trend reversal radar” that signals when a trend is likely to end and a new one may begin.
Step 1: Track Trend
PSAR plots dots below price in uptrends and above price in downtrends
Step 2: Acceleration Factor
Dots move closer to price as the trend continues, using an acceleration factor
Step 3: Signal Reversal
When price crosses the dots, PSAR flips to the other side, signaling a potential reversal
Reading PSAR Signals
Dots below price suggest upward momentum
Dots above price suggest downward momentum
Dots switch sides, signaling possible trend change
Key PSAR Components
Acceleration Factor (AF)
Controls the sensitivity of the SAR to price changes. Increases as the trend continues, making the indicator more responsive.
Extreme Price (EP)
The highest high (uptrend) or lowest low (downtrend) reached during the current trend, used to calculate the next SAR value.
SAR Value
The actual Parabolic SAR value plotted as dots on the chart, trailing price action and switching sides on reversals.
Trend Direction
Determines whether SAR is calculated above or below price, indicating bullish or bearish conditions.
Strategy Integration
5-Day Predictions
How PSAR Data Powers Machine Learning:
- Feature Input: PSAR signals are used as features for the RandomForest model, especially for trend-following trades
- Reversal Detection: Model learns to recognize PSAR flips as potential entry/exit points
- Stop Placement: PSAR values help the model set dynamic stop-losses
- Trend Confirmation: PSAR combined with ADX/MA10 increases confidence in trend trades
- Choppy Market Filter: Model learns to ignore PSAR signals during low ADX periods
Real Impact: PSAR helps the model time entries and exits more precisely in trending markets
1-Year Predictions
How PSAR Enhances Long-Term Forecasting:
- Regime Identification: Model uses PSAR patterns to classify trending vs ranging regimes
- Risk Management: PSAR-based trailing stops help manage drawdowns in long-term portfolios
- Trend Persistence: PSAR flips help model the duration and strength of market regimes
- Multi-Indicator Context: PSAR combined with MA10, ADX, and MACD for robust trend analysis
- Portfolio Rotation: Model uses PSAR signals to time sector and asset class shifts
Real Impact: PSAR helps the long-term model manage risk and adapt to changing market conditions
PSAR Signal Interpretation
Why Use PSAR in Trading?
- Clear trend-following and reversal signals
- Dynamic trailing stop placement for risk management
- Works well in strong trending markets
- Helps lock in profits as trends mature
- Easy visual interpretation on price charts
- Complements other momentum and trend indicators
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