Parabolic SAR in gold trading

The Parabolic SAR (stop and reverse) is J. Welles Wilder’s trailing-stop indicator. It plots a dot each bar that moves closer to price as the trend continues, using an acceleration factor that starts at 0.02 and rises by 0.02 each time a new extreme is made, up to 0.20. When price crosses the dot, the SAR flips to the other side.

How it applies to gold trading

PSAR is designed to keep a trader in a trend and exit when it stalls. On gold’s strong directional days, the dots trail price closely and give a mechanical exit. As the trend matures the acceleration factor increases, so the stop tightens quickly, which locks in profit but can exit before a second leg.

In ranges the indicator flips constantly. It works best as an exit tool or combined with a trend filter such as ADX or a moving average, rather than as a stand-alone entry system.

Worked example

Example (hypothetical numbers): gold trends up from 3,990 and the PSAR dot sits at 3,996, rising each hour: 4,000, 4,005, 4,011, 4,018. A long from 4,002 uses the dots as a trailing stop. When gold dips to 4,017, below the latest dot at 4,018, the position closes for about $15 profit per ounce.

A common mistake

Using every flip as a new entry in sideways markets. Most of those trades lose.

See also: Supertrend, Trailing stop, ADX, Trend following.

Frequently asked questions