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The parabolic SAR system is an effective investor's tool that was originally devised by J. Welles Wilder to compensate for the failings of other trend-following systems.
- DescriptionThe Parabolic SAR is a trading system that calculates trailing "stop-losses" in a trending market. The chart of these points follows the price movements in the form of a dotted line, which tends to follow a parabolic path.
- InterpretationWhen the parabola follows along below the price, it is providing buy signals.When the parabola appears above the price, it suggests selling or going short.The “stop-losses” dots are setting the levels for the trailing stop-loss that is recommended for the position. In a bullish trend, a long position should be established with a trailing stop that will move up every day until activated by the price falling to the stop level. In a bearish trend, a short position can be established with a trailing stop that will move down every day until activated by the price rising to the stop level.The parabolic system is considered to work best during trending periods. It helps traders catch new trends relatively early. If the new trend fails, the parabola quickly switches from one side of the price to the other, thus generating the stop and reverse signal, indicating when the trader should close his position or open an opposing position when this switch occurs.
- Example of an SAR parabolic studyYou can see from the chart below in green the Parabolic System applied to the USDJPY pair.
- DefinitionRSI is based on the difference between the average of the closing price on up days vs. the average closing price on the down days, observed over a 14-day period. That information is then converted into a value ranging from 0 to 100.When the average gain is greater than the average loss, the RSI rises, and when the average loss is greater than the average gain, the RSI declines.
- InterpretationThe RSI is usually used to confirm an existing trend. An uptrend is confirmed when RSI is above 50 and a downtrend when it's below 50.It also indicates situations where the market is overbought or oversold by monitoring the specific levels (usually “30” and “70&rdquo
that warn of coming reversals.An overbought condition (RSI above 70) means that there are almost no buyers left in the market, and therefore prices are more likely to decline as those who previously bought will now take their profit by selling.An oversold condition (RSI below 30) is the exact opposite. - Example of RSIYou can see in red from the chart below the Relative Strength Index of the GBPUSD pair.
