Cryptocurrency trading can be a lucrative venture, but it’s important to use the right tools to maximize your profits. One tool that is often overlooked is the parabolic SAR indicator. This article will explain when to use SAR in crypto trading and how it can help you make more informed decisions. Stay ahead of the competition with this valuable information.
When Placing Stop Loss Orders
One of the more interesting aspects of SAR is how it can optimize stop-loss orders. As you may already know, a stop-loss order will automatically close your trade when the market price reaches a certain level. Stop losses are important because they help prevent traders from losing too much money if an asset’s price plummets unexpectedly. However, stop losses are not perfect, and there is always room for optimization.
One major issue with stop-loss orders is that they are placed after opening the trades. Thus, if you place your stop loss too close to your entry price, there’s a chance that random market fluctuations will trigger it before the asset’s price has a chance to reach your target price. SAR can be used to help determine an appropriate distance.
The Current Trend’s Direction
SAR is not always accurate in predicting candle movements, but it does a great job of signaling you when the market trend has changed direction. If the price is moving up and the indicator changes from white to red, a reversal is likely. Conversely, if the price is falling and the indicator turns red to white, it signals an impending reversal.
SAR can be used with other indicators such as RSI and Bollinger Bands to determine whether a given market trend is likely to continue or reverse. (For related reading, see: It’s All About Singularity .) The Stochastic Oscillator can be used to help confirm that SAR is pointing in the right direction.
When Price Averages Too High
Another possible application for SAR is to help identify when the asset’s price is averaging too high and may start to drop. You can utilize this information by placing a trailing stop-loss order below the indicator. For example, if your initial stop loss was set at $10 and parabolic SAR suddenly turns red, you could move your stop loss down to $9; this will ensure that you only close your trade if the price starts to fall.
When Entering a Position
Using Parabolic SAR during the opening and closing is also possible. If you enter the market after the indicator has turned white, there’s a chance that it will turn red soon and signal an impending downward trend; you can avoid this by placing your stop loss above the current price level. Conversely, if you’ve just exited a position and the indicator turns white again, there’s a good chance that it will turn red soon. You can avoid this by moving your stop loss below the current price level (this is only possible if you exit again).
When Looking for a Buy
Although not technically indicative of a buy signal, SAR can be used to confirm that the price is likely to increase. You can do this by turning off all indicators and only checking the indicator’s color. When the indicator turns green, it means that there is an impending market reversal, and you should not open any new positions. If it turns red, you’ll know that there’s no guarantee that the price will drop in the immediate future, and you can begin looking for a buy.
When Price Reverses Direction
It’s possible to use SAR oppositely when the price reverses direction. If you see SAR turn white after a period of red, this indicates that the price is likely to fall. If the indicator turns red after a period of white, the market will turn upward. When this occurs, you can place a buy stop above the candlestick closest to the indicator to capitalize on the reversal.
When Using Two Periods
SAR is based on two periods, and you can choose what these two periods are (2/20 or 3/3). This parameter determines how quickly the indicator will react to changes in the market; a 2/20 SAR oscillates much more frequently than a 3/3 one. This characteristic can be used to your advantage. For example, you can use 3/3 to indicate strong trends and 2/20 for short-term reversals. Two periods are better suited to long-term trends, while three are suitable for short trades.
When Using Two Parameters
Another way to utilize the indicator is to move the SAR setting along with the price; if the price is higher, you can do this by adjusting both settings in the same direction. For example, if the price increases immediately after a candlestick close, adjust both parameters upward (and vice versa). This will help identify weak trends and allow you to take advantage of them.
When Using an Oscillator Like MACD
You can also use SAR in conjunction with other indicators like the MACD or RSI. If your primary indicator is pointing upward, you can increase the number of periods for SAR to identify short-term trends. Conversely, if your primary indicator is pointing downward, you can decrease the number of periods for SAR. During sideways or volatile markets, you can use both indicators with the default number of periods for SAR.
While there are some popular misconceptions about what SAR does, it’s a very straightforward indicator that signals important information about the price. It does not predict the future; instead, it tells you whether or not there is likely to be a reversal in the market trend. It also enables you to time your entry and exits based on this information rather than rely on guesswork.