Introduction to Parabolic SAR PSAR | Cameron May | 1-13-20 | Getting Started with Technical Analysis

Introduction to Parabolic SAR PSAR | Cameron May | 1-13-20 | Getting Started with Technical Analysis


good morning and welcome her one my name
is Cameron May let’s see it’s a 1107 Eastern Standard Time on a Monday
morning that means it’s time to get back into our ongoing series of discussions
called getting started with technical analysis this is one that I prepared for
hard this morning I’m looking really forward to this we’re gonna be talking
about something called the parabolic SAR stop and reverse and that’s a bit of a
mouthful but I think we’re gonna have fun exploring it we’re gonna talk about
how its constructed and how it might be potentially used in the administration
of a stock trading account so everybody thanks for joining me this morning hold
there Alfred Jeff jail Uxbridge Phil Dave Michael Barry GS Brent and on and
on we have a lot of people already in attendance thanks for being here every
Monday morning with me I appreciate it if you’re here for the very first time I
want to welcome you as well I think there’s gonna be time well spent
and if you’re watching in on the YouTube archive after the fact enjoy the show
but be aware that you’re invited to join us on Monday mornings non occur pardon
me 11 o’clock Eastern Standard Time is when we kick things off so let’s dive
into it before we can get into the the particulars of the parabolic SAR first
thing that we need to do is consider the risks associated with our investing as
risks are real quick reminder that any investment decision you make in your
self-directed account is solely your responsibility we are gonna be using
real examples in today’s discussion it’s not a recommendation or endorsement of
those securities or those strategies transaction costs are important factors
that should be considered when evaluating any trade here’s a quick
overview of the Greeks for those who use technical analysis for the
administration of their options trading and and all investing involves risks
including risk of loss all right so let’s go to the agenda for today I’ve
already hinted at it we’re gonna define the parabolic stop and reverse known
also as the parabolic SAR and a contraction of stop and reverse or the
piece are prepared by pair ball like stop and reverse so we’re gonna define
it then we’re going to discuss potential ways to use it for trading entry signals
and maybe even exit signals and then we’re going to illustrate that through
repetition we’re gonna look at some real current example so that we tie theory to
application so you walk away with an understanding of what
the parabolic stop and reverse is and how it might be used for the
administration of self-directed stock portfolio all right so let’s go right to
it out of this one I think you guys have gotten familiar with the rhythm of
today’s of Mondays discussions and that is we take a look at how a technical
indicator is constructed and then we apply it some are very basic indicators
others are more complicated and I told you I prepared hard for this one this
morning I’m familiar with the piece our parabolic SAR but I wanted to be able to
communicate it easily and so sometimes what I’ll do as I prepare as I literally
just get out there in research how are others communicating this what are the
what are the shortcut ways to make this simpler I couldn’t find anything that
would make it simple I labored over this until I figured out all right here is
the simple way to calculate piece R and we’ll talk about applying it but I think
this can be a fairly unique experience because I couldn’t find anything else
like what I intend to do today so let’s first add the piece R to our chart and
I’ll apologize for using different names it happens to carry three three common
names and so I use those interchangeably I hope hopefully we’ve introduced those
well enough you know what I’m talking about but I’m gonna come up here to our
edit studies icon a little beaker icon and let’s type in parabolic the
article’s parabolic SAR is what we’re looking for we’re gonna click Add
selected and you’ll notice right here we always pause just to take a look at the
inner workings here these two numbers are going to be important in our
discussion point zero two and point two okay just keep those in mind and I’m
just gonna click apply and click OK and now you’ll see we have our indicator
applied to our chart and it’s displayed as a series of dots sometimes above
price activity sometimes below price activity what I want to talk about first
is what are those dots how are they calculated and then we’ll talk about how
they might be used for trading alright so I’m going to zoom
a lot closer to what’s going on here with Ulta there we go we’ll just use the
last maybe the last few weeks of information but that gives us a closer
look at these dots all right so let’s go now to calculating PSA our piece are all
right you’ll notice with the dots sometimes they’re below price other
times they are above price now what I want to do is I just want to focus on
these most recent three dots here that are below the price all right now
there’s a reason why they’re below sometimes above but just know that every
time it shifts there’s a simple starting point and this is one of those things
where the other videos other explanations that I investigated just
didn’t do very good justice you veterans explain to me as close as you can
where did we get this dot right here what in the world is that well you’ll
notice this dot lines up with this low right here I didn’t didn’t draw my low
very well but the low of that candle is exactly equivalent to that dot that’s
where that dot came from well all that we do to create that first dot is we
look at the last series of dots so here’s a start and here’s the end and we
look at the lowest point during that time frame okay that’s it so what was
the lowest point it was that low so that becomes our first low dot that’s our
first piece our value all right so that’s really simple now when we’re
above where do you suppose we get that dot well we look at the highest point
within the last range of dots or piece ours that’s what it is so that that dot
we could even we can even confirm these things at in absolute terms as I hover
over that dot you’ll notice we can look up here in the upper right let me put my
cursor over that dot again the value of that dot is 246
74 what’s the lowest price on this day look at your lo 246 74 that’s where
that’s coming from so that’s that’s what we would call our initial peace our
that’s interesting or that’s that’s important because we need to know that
for our equation okay now let’s get into the calculation of the second dot and
once we know how to calculate that then we can just continue on with the whole
series but there are a couple of terms that we need to know in order to
calculate that second but the first term is known as the extreme point ooh that
sounds fancy what is the extreme point well the
extreme point is just the recent high okay so an extreme point is making
reference to higher high as the highest points as we’re going up or the lowest
points as we’re going down so for this second dot we would look at today’s
candle see if we’ve made a higher high and that becomes the extreme point right
in an upward trend we use the highest in a downward in the calculation of
downward dots basically when we’re when these dots are going down we would use
lows but we look at today’s high that becomes our extreme point our EP and
then the other thing that we need to know is the acceleration factor now this
indicator was created by J Wells wilder he is also the creator of the RSI and
the on the Average True Range but he employs something called the
acceleration factor to calculate these dots because the dots are intended to
chase after price when the dots are below price there they’re calculated to
run up and try to catch up to price when when price is below the dots the dots
are designed to chase down those dots coming downward does that make sense so
price is moving away and the dots got a they have to accelerate to catch up so
we have what’s called the acceleration factor
and that acceleration factor is point zero two all right if you don’t
understand why I just know that that fits into the equation but that
acceleration factor has a maximum value of 0.2 so now that we know those two
names whether you caught why they’re there that’s okay they just fit into the
equation for calculating these numbers let’s see if we can calculate the exact
value of this next dot okay this one was easy
this one’s a little more difficult okay so what we start with according to our
equation is the prior PSR or PSR so prior PSR it was 246 74 okay and I’m
not gonna put the dollar signs in there we’re just going to 46 74 and then we’re
gonna add that to first of our acceleration factor so that’s point zero
two times the number of dots since we’re starting
well there’s one and there’s two okay so we’re gonna take our acceleration factor
point O to multiply that by two all right then we’re gonna continue with our
equation we take our extreme point what’s our extreme point well if we’re
calculating dots that are rising we’re gonna check today’s candle and we’re
gonna see it has a higher high so we’re gonna use that high the highest to sixty
seven thirty two sixty seven thirty and then we’re going to subtract the prior
piece our I put in them multiple yeah I put it in as though we’re multiplying
we’re actually subtracting here so what was the prior piece are well the prior
piece ours right here 246 74 246 74 we’ll plug that in and let’s carry that forward so we have
240 674 we’re gonna add that too let’s see what that can be 0.04 times
what’s 2 7 2 267 3267 30 minus 240 674 that’s 2056 I don’t
even need to have these brackets in there let’s take those out those
parenthesis so let’s do that 250 20:56 times point zero 4 equals
point 8 2 2 4 that’s this value right here and then finally we’re just going
to add that to 246 74 let’s see what value we get 247 56 is
what we’ve just calculated as a second dot there we go
what is that act what’s the actual value of that second dot well if we look up
here in the upper right let me hover over that dot again right there
what’s that value 247 56 that’s how it’s calculated we’ve sort of solved a
mystery here and I did not I could not find that calculation explored in any
greater accurate detail lots of explanations given them other places
that just weren’t accurate but that’s how that’s calculated so what are we
actually trying to do well we’re trying to identify accelerations well the
strength of a current trend all right so the way that J Wells wilder envisioned
this is as the dots are rising and rising and accelerating toward price the
assumption is that trend is continuing because the only way that we get a
higher dot is if we get a higher high we don’t raise that dot if we don’t have a
higher high so actually do sometimes but in any case the dots accelerate up
representing the current direction but if price weakens and comes down to where
it touches where the next dot should go that stops the current sequence of dots
and reverses to a new sequence so follow this of this previous sequence of dots
it’s going up it’s going up it’s going up it’s going up and you notice it’s
catching up with price and actually this day you’ll notice the tail of that
candle came down and if we were to extrapolate out where that next dot
should have been probably right up around here well it intersected with
price finally and if there’s an intersection of dots with price we stop
and reverse and we pop up here and we start that sequence again so we hop up
above we line up with the highest point from the
from the previous dot period you might look at it over the piece our period and
then we start calculating with the with an inverse calculation to do a drive the
dots downward so I knew that was going to be some heavy lifting but some of you
are probably saying camera net is way too much information for me that’s okay
what I’m what I’m the audience that I’m teaching to right there is just those in
the audience who like to know exactly how the engine works now let’s get into
how might this be applied well if i zoom back out the parabolic SAR is typically
seen as it’s very simple if price is above that’s interpreted to be bullish
if price is above the dots if price slips below the dots that’s interpreted
to be bearish so a technician might look at this and say oh look at this so price
has recently moved above the dots that maybe forecasting that we’re getting
more commonly higher highs and now we’re seeing an upward trend and for some
traders that that’s enough to take an entry signal and then they may just
carry that through until the until the dots reverse again basically pretty
simple so let’s talk about potential application let me close up my
calculator here and I’ve prepared a few notes for potential application there we
go so when the candles are above the dots that seam is being generally
interpreted to be bullish candles below the dots generally interpreted to be
bearish dots do accelerate toward price and you’ll see that in in the way that
that they appear let me just maybe what we’ll do is bring up a different stock
how about we look at you know what’s been going on sorry to do something that
maybe gets a lot of traction otherwise how about Apple I want to look at the
appearance of the dots notice the dots are comparatively initially they don’t
rise very quickly can you see that from one day to the next from one candle
that X they’re not rising very rapidly but they start to accelerate upward that
from that we get the term parabolic we’re moving up rapidly and and
eventually they catch up with price and if price comes down touches the dots
then we may get a reverse right there is an example where we had a really close
one what was our dot so our low yeah you can
see right there where it looks like the the bottom of that candle sitting right
on the dot the low of that day was to 292 75 but the piece our value was 292
73 so price got within two pennies but it didn’t touch it that’s why we
continued with that piece are rising okay Jeff says oh you can’t find it in
the beaker came in a few minutes late yeah no problem Jeff thanks for being
here just type in the word parabolic and you’ll find it it’s actually parabolic
SAR is the name in the thinkorswim menu alright sometimes in other areas you
might see piece are I suppose somebody might actually spell it out parabolic
stop and reverse but yeah parabolic SAR is probably the most common term that
you hear applied to this all right but let’s look at Apple as our example
you’ll notice right here piece ours were rising and then we had an intersection
of price running into where that where that dot should have been the next dot
in sequence and so the dots rise above price and then start falling right there
might be a signal for a trader to take a step back from a bullish position now in
this case that may have led to a little bit of frustration because really the
dots only went a few days downward and then continued rising and that can
certainly happen with this indicator as with any others now a point that I want
to make with piece R is that it is an indicator that typically does best in a
strongly trending stock a stock that’s making higher highs and higher lows or
if we’re trading downward stock making lower highs and
lower lows and so sometimes it is paired with a trend indicator so something like
a longer term moving average maybe a 50-day moving average a hundred day
moving average something like that well actually says did we already look
at Microsoft we looked at Microsoft in of their clotted webcast not this one
though Veronica says could you say that the closer the piece are is to the
candles and the trend is not as strong possibly yeah it could be that the trend
is not as strong as it was initially but piece R is designed to accelerate up to
a certain point after a while you’ll notice doesn’t it look like these are
pretty pretty consistent increments as we look at example as an example right
there well we’re just going up that piece R is going up at a steady pace at
a constant pace that’s because the piece our calculation has a maximum
acceleration factor so it’ll only accelerate so quickly and then that rate
of acceleration remains constant so if you have a stock whose price
appreciation is matching that maximum acceleration value on the piece R it’ll
remain above for some time as it has done here with with Apple but it does
require some significant strength in that price appreciation so yeah Veronica
if that strength starts to falter at all the piece R can catch up very quickly to
price now does that mean that a trader might say well even if there’s a
narrowing of the gap between price and piece are that it’s time to get out not
necessarily now that trader could use that as their
own set of guidelines but I don’t think you know and just my experience with the
indicator and that is a it’s a limited data set anytime I say might expire
experience obviously someone else have on it might have a different experience
I haven’t encountered any any traders who use that as a guideline but I can
see it’s at least potential for application good question
all right so one thing I’m not going to explore in any great detail today is a
downward sloping piece R although this is an indicator
that might be used for downward traits a couple of other points I want to make on
this though is that it is it is an indicator that might be used in other
timeframes so this we’re using a one-year daily chart to illustrate today
it might be used on a weekly chart or even on an hourly chart and let me see
if I had anything else that I had missed I thought I had maybe a couple of points
I think that’s about it actually so let’s look to see let’s do maybe one
more example how about we just go to our watch list of S&P 500 companies maybe
we’ll just scroll down through and let’s just grab a stock at random how about
Autodesk I want to see when the last signal was for peace our here’s a maybe
a good example maybe I’ll go back even a little bit further let’s include maybe
some of these whipsaw bands this is a good example of how piece R is not one
of those indicators that’s designed to perform very well in a sideways sideways
trending stock because here it might be telling us to get bullish here and they
get bearish there and get bullish here and get bearish there and get bullish
here so actually get bullish right there and then and then bearish right here or
in and out is another way to put it if we’re talking about bullish trades so
through all of that period there may have been very limited gain or maybe a
small net loss it’s sort of a whipsaw experience and that can get frustrating
this is more of an indicator that’s that’s intended for those up swings or
down swings in a stock during a time when a stock is going sideways if a
moving average is going sideways or if we see horizontal areas of support and
resistance it’s very likely not going to add much value all right so some of you
are already going off and applying this to other other charts great
that’s exactly Veronica suggesting one there Thank You Veronica let’s just wrap
up Autodesk’s though we can see right here as price started to strengthen
right there the piece are started to rise there was an indication of
potential entry short maybe in and out right there and then again we’re right
back into an upward trend in stock right that is how a trader might use this
indicator so what I would suggest you do if this is your first introduction to
the parabolic SAR maybe you want to just add it to your own chart remember you’ll
go up to that beaker icon type in the word parabolic that’s the key and you’ll
find it there so if you go to your paper money account maybe run through three or
four or five symbols and go back through history and do a little bit of testing
to see how parabolic SAR might perform on the symbols that you’re following and
particularly maybe if paired with something like a longer term moving
average all right Jeff is it Jeff says is this an indicator that needs
confirmation it’s a good question again it’s an indicator that that if it’s
already paired with a moving average or something along those lines
if that moving average is moving up this indicator is sort of a self confirming
indicator meaning if we get that switch if we see those dots go from above price
which is bearish to below price which is bullish that’s that’s effectively the
entry signal in this case if you look at that chart there are a few days where
that didn’t immediately pay dividends it took a little while for price to start
to mirror what piece R was forecasting it’s not always gonna do that everybody
thanks for joining me today I definitely appreciate your attendance go get some
repetition with this new indicator the first 15 minutes of this webcast is
probably one that you’ll want to go back and revisit because this one the
calculation that if you really want to know how those dots are calculated
you’ll probably have to get a little bit of repetition with calculator it might
be a man interesting see if you can calculate see if you can calculate it to
the penny the current piece R value for any stock
that you can pick in your portfolio all right but I’m going to set you loose if
you’re intrigued by these sorts of concepts you may
want to check out patent law Lee’s webcast that’s called advanced charting
techniques it’s lime on Fridays or I’ll just link an example webcast right up at
the upper right hand corner on the YouTube Archive for this session thanks
for joining me today Jeff Susan my pleasure I always
appreciate that you give me your time I try to give you value in return I hope
that that’s what you’re taking away from this we’re gonna do this again next week
find a new indicator that you maybe heard of but you don’t know how it’s
built or how it works and it will break it down and explore it alright thanks
everybody quick reminder of the risks associated if you’re investing risks are
real we did use real examples in today’s discussion it’s not a recommendation or
endorsement of those securities or those strategies you’re invited to join me in
my other regularly scheduled sessions that run throughout the week or if you
just circle back again next Monday for another introduction another getting
started with technical analysis discussion I’d love to see you then but
whatever I see you again until that moment arrives I want to wish you the
very best of luck happy investing bye bye

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