Keep in mind pSAR has to be used with other tools…it is not always a
signal all by itself…if it was that simple, we would all be
millionaires here! Lol!
Since I have worked with pSAR for about 5
years, here is what I have learned over that time…in a TRADING market
(like the one we are in now), pSAR tends to whip-saw more often. You
can tell if we are in a trading market by looking at ADX–the black ADX
line should be falling or flat. In fact, when in a TRADING market, I
sometimes view pSAR as a target for the stock to come back and take out
the pSAR dots (or pSAR line, however you track it–I like the dots
myself). Look at other graphs too for the take-out action to happen,
such as oscillators like RSI and Stochastics in a trading market…what
direction are they pointing?
When ADX is rising, then you have a
TRENDING market…in this environment, pSAR is going to be way more
accurate at moving you in and out on a timely basis.
using pSAR on daily charts, try this, which is something I do with high
beta stocks (that is, fast moving, volatile stocks): Set the pSAR
parameters to (0.03, 0.3) and this will give you tighter stops.
However, be aware that tighter stops will give you more whip-saw–you
could get shaken out of positions that eventually become
profitable…personally, I am not real fond of (0.03, 0.3) situations,
because my style is not one of day-trading, but more of swing-trading.
However, if you are more the day trader, or a two-day swing trader, you
mahy find the (0.03, 0.3) parameters to your liking.
in mind dominant and weak side trends with pSAR. Look back on your
charts and notice what has been the dominant trend with
pSAR…generally, in a stock that is rising over time, you will see
that bullish pSAR is dominant. In a stock that is falling over time,
the bearish pSAR dots will be said to be dominant. So, when you get a
flip into dominant trend, your more likely to see a strong move in
favor of the trend.
If you get a flip into pSAR on a weak side
trend, then their is the greater chance of sideways action, or as has
happened to you, the stock will move back toward the pSAR dots as if
the dots themselves are the target.
One final thought: If your
chart software has a tool known as TRIX, try running TRIX in the
standard (15, 9) mode on the daily chart and check it against pSAR
changes. Generally, TRIX is like a confirmation tool just as pSAR
is…I’m less experienced with TRIX, but TRIX often has a delayed
response on rising and falling crosses (it has a signal and fast line,
just like stochastics)…I have been testing TRIX along with pSAR
lately, and I find that when TRIX crosses shortly before or after pSAR
flip, the trend is stronger in those situations.
Good luck! ACE