Today, we want to discuss another tool that helps identify the change of a short term trend (not trend strength) that typically lasts for 2 to 6 weeks. Please don’t confuse a trend reversal with the trend strength. The indicator we wanted to discuss is know as ParabolicSAR and has been around for 30 years. It is not going to give you an edge, but it will help you identify trend changes for short term trades.
Let us preference, this indicator will not tell you the strength of the trend nor is it is useful for intermediate to long term investors. Furthermore, remember counter trend reversals or significant trend reversals will have a weak trend from the absence of buyers. Lastly, if you are a longer term investor you can use it on a weekly chart, but the variance is significantly greater on this time period, so its not extremely timely.
Now there are a couple important things to remember. A. make sure the stock is not short term overbought in the initial reversal phase or you will have missed most of the move. You can use the bollinger band, if the price or candle closes 100% outside of the band. B. I don’t like using ParabolicSAR with gap breakouts as a lot of the gains are already in the stock. Lastly, I personally like Heikin Ashi charts coupled with ParaboliSAR. But let’s not get crazy, just apply it on your chart, and the default settings are just fine, you will only curve fit the settings.
Swing Trade & Trend Following with an Intermediate Trend line
The chart of Amazon below is a good representation of ParabolicSARs limitations for intermediate to longer term trend following. However, its a great resource to swing trade a stock that has a strong intermediate to longer term trends.
- You will notice that the ParabolicSAR had 7 Bullish & Bearish Trend reversals since the ATR Trailing Buy Broke-out at $560. While this is not ideal for longer term trend following and investors would have not captured all the gains the ATR Trailing buy did, it does allow investors to swing trade shorter trends within a bullish longer term trend like AMZN.
