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TA Challenge: How to use the SAR to spot reversal signals?
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doctorpot1 joined discussion · Jul 5, 2022 00:38

SAR, a simple to use tool with built-in stop-loss function, and it does not require us to stare at the charts every seconds

TLDR: To explain Parabolic SAR in a layman term it is a tool that say "I think the market will move in this direction, but I may be wrong, so abort mission if it hits this stop-loss point. The stop-loss point will shift every day so don't be lazy, update it daily." However, this tool is only good when there is a dominant trend, which makes me wonder, if there is a dominant trend why not just buy and HODL?
Story time
I am no fan of Technical Analysis, but I can accept the parabolic SAR technical indicator, because it has a built-in fail-safe mechanism known as the stop-loss point which many TA tools does not have. It is like the creator of this tool wants to tell you that "I think this is the way the market will move, but I may be wrong, so abort mission if it hits this stop-loss point."
Because there is a stop-loss function, we do not need to be watching the price chart every second. Just set it up daily and go to bed. Great for normal people like us . The tool is quite simple to use, the colour and the location of the dots represents the direction it is predicting the price will go, and the dots are prices to set the stop loss at. Every day, the stop-loss value will update so you have to update it accordingly. As seen in the image below:
How to use SAR
How to use SAR
After much research it is found that SAR produce good results in trending environment where there is a dominant trend (clear bullish or bearish market), but it creates many false signals and losing trades in a volatile and side way market. It is also said that it is best to use it to trade with the trend rather than against the trend. i.e., In a bullish market, go long only. In a bearish market, go short only. However, do note that going short is very risky so be wary.
Therefore, other technical tools, such as the moving average are used to aid us to determine the dominant trend.
Backtesting is key
With any trading strategy, the golden rule is to do back testing. Thus, I have done some back testing with the following stocks during 7 Jan 2022 till 5 July 2022.
1. $Grab Holdings (GRAB.US)$ : clear bearish trend then side way trend
2. $Futu Holdings Ltd (FUTU.US)$ : unknown trend (as it had been bearish for a long time, but with many signs of reversal but U-turn after a while)
3. $UP Fintech (TIGR.US)$ : unknown trend (as it had been bearish for a long time, but with many signs of reversal but U-turn after a while)
4. $Occidental Petroleum (OXY.US)$ : clear bullish trend but not sure if still clear bullish for now
At the end of 2021, we know that market was turning bearish , so if we were to use SAR to help us short most stocks that should be helpful. So, with all record-breaking IPO of non-profitable companies are crashing hard,
I back tested going short on GRAB using SAR.
Back testing of shorting GRAB with SAR
Back testing of shorting GRAB with SAR
What can be seen is that it works very well in the beginning. However, as the share price of GRAB became ridiculously low, SAR didn't work so well as the stock traded sideway and is very volatile.
As the drawback of the tool is that it won't work well on stocks that is trading sideways or are very volatile, thus I tried it on Chinese ADS.
With Moo Moo and Tiger, I back tested both short and long on it.
Back testing of shorting FUTU with SAR
Back testing of shorting FUTU with SAR
Back testing of longing FUTU with SAR
Back testing of longing FUTU with SAR
Back testing of shorting TIGR with SAR
Back testing of shorting TIGR with SAR
Back testing of longing TIGR with SAR
Back testing of longing TIGR with SAR
I did turns out that the result isn't that reliable. With Tiger, going long or short using SAR yields almost 0%. But what was interesting is that there are days where the share price rockets by 50% immediately, so we can't invoke the stop-loss at the optimal price, so it is risky for shorts .
I think using SAR on bullish trend would be a safer trading strategy, Thus with oil price going to the moon thanks to crazy shortages, oil stocks are known to be the best bet.
Therefore, I back tested going long with Occidental Petroleum using SAR.
Back testing of longing OXY with SAR
Back testing of longing OXY with SAR
What can be seen is that it works very well almost throughout the period. During the trading period, it provided us with a few breaks for us to take profit and re-analyse the situation. So if we have taken the break to look at the geopolitical situation of oil, it could tell us whether to continue trading on the uptrend or not.
As the tool only work well when there is a clear trend, it does beg the question is it still useful?
After thinking about it, it does seem to have some utility. Which is for us to take profit at the sign of potential reversal in trend, and then analyse and decide if there is a real reversal to adjust our strategy. On top of that, the tool provides a mathematically determined stop-loss price for us. I mean most of us either don't have a stop-loss set or just set it based on our feeling, right? So, SAR can help to give us a sense of what might be a good stop-loss to put .
Conclusion
Even though I dislike TA, I'm intrigued by Parabolic SAR as it is simple to use, with built in stop-loss function and most importantly, we don't need to stare at the charts every seconds . Thus, I will be exploring to see if there are utility on derivative, as well as finding out if there are similar "fire and forget" tools. Having more knowledge and tools are great but having too many tools can cause analysis paralysis . So, I think we should not over complicate our strategy with too many tools too.
Even though there seems to be a dominant trend which is bearish now, I won't be shorting any stocks as the risk is too great. Just one crazy reversal, means all stocks will rally hard and that can cause a margin call . So maybe I will wait for the bull market before trying this tool out so trade safe ya!
Disclaimer: Community is offered by Moomoo Technologies Inc. and is for educational purposes only. Read more
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doctorpot1
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crawled out of poverty, working towards FIRE!! (financial independence, retired early)
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