Professional investors and traders weed through a lot of financial information every day in order to help them make the most sound financial decisions possible. In order to interpret all that complex statistical data, a tool is sometimes needed to highlight the direction that a stock’s price is moving. The parabolic stop and reverse (PSAR) indicator is a technical analysis tool that helps investors highlight meaningful trend data.
What is the PSAR?
The parabolic stop and reverse indicator is represented graphically by a set of dots above or below a stock’s price direction as charted over time, i.e. its price trend. This second line follows the mainline closely, highlighting the direction in which it is moving.
If the dots occur underneath the price trend, it means that the trend is continuing upward. If the dots occur above the line, the trend is moving downward.
The indicator is called a stop and reverse because when it touches or crosses the price trend line it is stopping its current direction, and beginning a reversal in the other direction.
What is the PSAR Used For?
The parabolic stop and reverse indicator is used for three primary purposes:
- To help highlight the direction of a price trend
- To provide entry points for trading decisions
- To provide exits points for trading behavior
As previously discussed, the PSAR underscores the general direction that a stock’s price is moving. It serves to provide a continuous signal to investors as the PSAR will always run alongside the price trend line as long as the metric is being measured.
When the PSAR highlights a strong upward trend, this indicates a good entry point for trading. Conversely, when the trend reverses, it can indicate a potentially good exit point for trades.
The one point of caution to consider is when there isn’t a clear trend present. In this case, the PSAR may show false exit signals indicating bad exit points and a potential loss of money through continued trading.
Parabolic Stop and Reverse (PSAR) | Indicator Series Click To TweetWhat are the Advantages of Using the PSAR?
The parabolic stop and reverse tool is most useful when the stock’s prices are going through frequent or large swings in direction.
If the investor sees an upward trend highlighted by dots below the price line, it indicates that it is a good time for the investor to buy. If the dots occur above the line, it is time to sell, but this should be determined in conjunction with other indicators and tools. The PSAR works best as a supplemental indicator paired with other statistical methods to flesh out the data which it provides. It does best highlighting upward trending but can be problematic when showing a downward trend.
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