Parabolic SAR, also known as PSAR is one of the simplest yet powerful technical indicators. Most of the technical indicators that we have discussed so far assists in determining the start or direction of trend, but parabolic SAR helps to know when the ongoing trend ends and the next one starts. SAR stands for “Stop and Reverse”. PSAR is developed by famous technical analyst “Welles Wilder“, who also developed other popular indicators like RSI, ADX and ATR. This indicator is based on momentum with respect to time and very accurately predicts price reversals. In this article, we would go through a Parabolic SAR Trading system for NSE Nifty. This profitable strategy can very well be used for other scrips and instruments as well.

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How to use Parabolic SAR for trading?

Parabolic SAR is incredibly simple to use. When imposed over a stock chart, it plots a series of dots either above or below the price line.

• If PSAR dotted line is below the price, it indicates buy signal
• If PSAR dotted line is above the price, it indicates sell signal

It works well in trending markets, and exhibits whipsaws during sideways market. Many traders also uses parabolic SAR as a stop loss indicator to exit their trade.

Parabolic SAR Trading System – AFL Overview

Parameter	Value
Preferred Time-frame	Daily
Indicators Used	SAR (Stop and Reverse)
Buy Condition	Price candle crosses SAR dotted line from bottom
Short Condition	Price candle crosses SAR dotted line from top
Sell Condition	Same as Short Stop Loss Hit Target met
Cover Condition	Same as Buy Stop Loss Hit Target met
Stop Loss	1%
Targets	5%
Position Size	100% of Equity
Initial Equity	200000
Brokerage	100 per order
Margin	10%

Parabolic SAR Trading System – AFL Code

//------------------------------------------------------
//
//  Formula Name:    Parabolic SAR
//  Author/Uploader: Trading Tuitions
//  E-mail:          support@tradingtuitions.com
//  Website:         www.tradingtuitions.com
//------------------------------------------------------

_SECTION_BEGIN("Parabolic SAR");

SetTradeDelays( 1, 1, 1, 1 );
SetOption( "InitialEquity", 200000);
SetOption("FuturesMode" ,True);
SetOption("MinShares",1);
SetOption("CommissionMode",2);
SetOption("CommissionAmount",100);
SetOption("AccountMargin",10);
SetOption("RefreshWhenCompleted",True);
SetPositionSize(100,spsPercentOfEquity);
SetOption( "AllowPositionShrinking", True );
BuyPrice=Open;
SellPrice=Open;
ShortPrice=Open;
CoverPrice=Open;

SetChartOptions(0,chartShowArrows|chartShowDates);

_N(Title = StrFormat("{{NAME}} – {{INTERVAL}} {{DATE}} Open %g, Hi %g, Lo %g, Close %g (%.1f%%) {{VALUES}}", O, H, L, C, SelectedValue( ROC( C, 1 ) ) ));

Plot( Close, "Price", colorWhite, styleCandle );

accel = Param("Acceleration", 0.1, 0, 1, 0.01); 
mx = Param("Max. acceleration", 0.2, 0, 1, 0.1); 

F_SAR = SAR(accel,mx); 

colordots = IIf(F_SAR < L,colorGreen,IIf(F_SAR> H,colorRed,colorWhite)); 

Buy = Cross(C,F_SAR); 
Short = Cross(F_SAR,C); 
Sell=Short;
Cover=Buy;
Plot(F_SAR,"\nF_SAR",colordots,styleDots|styleNoLine); 


Buy=ExRem(Buy,Sell);
Sell=ExRem(Sell,Buy);

Short=ExRem(Short,Cover);
Cover=ExRem(Cover,Short);

StopLoss=Param("stop",1,0.5,3,0.5);
ApplyStop(Type=0,Mode=1,Amount=StopLoss);
	
Target=Param("Target",5,0.5,5,0.5);
ApplyStop(Type=1,Mode=1,Amount=Target);

printf("\nBuy : " + Buy );  
printf("\nSell : " + Sell );  
printf("\nShort : " + Short );  
printf("\nCover : " + Cover ); 


/* Plot Buy and Sell Signal Arrows */
PlotShapes(IIf(Buy, shapeSquare, shapeNone),colorGreen, 0, L, Offset=-40);
PlotShapes(IIf(Buy, shapeSquare, shapeNone),colorLime, 0,L, Offset=-50);
PlotShapes(IIf(Buy, shapeUpArrow, shapeNone),colorWhite, 0,L, Offset=-45);
PlotShapes(IIf(Cover, shapeSquare, shapeNone),colorGreen, 0, L, Offset=-40);
PlotShapes(IIf(Cover, shapeSquare, shapeNone),colorLime, 0,L, Offset=-50);
PlotShapes(IIf(Cover, shapeUpArrow, shapeNone),colorWhite, 0,L, Offset=-45);
PlotShapes(IIf(Sell, shapeSquare, shapeNone),colorRed, 0, H, Offset=40);
PlotShapes(IIf(Sell, shapeSquare, shapeNone),colorOrange, 0,H, Offset=50);
PlotShapes(IIf(Sell, shapeDownArrow, shapeNone),colorWhite, 0,H, Offset=-45);
PlotShapes(IIf(Short, shapeSquare, shapeNone),colorRed, 0, H, Offset=40);
PlotShapes(IIf(Short, shapeSquare, shapeNone),colorOrange, 0,H, Offset=50);
PlotShapes(IIf(Short, shapeDownArrow, shapeNone),colorWhite, 0,H, Offset=-45);



_SECTION_END();

AFL Screenshot

As you can see in the chart, the frequency of signals is quite high. It can be further optimized by changing the parameters or using it in conjunction with other indicators.

Also Read: USD-INR Currency Trading Strategy

Parabolic SAR Trading System- Backtest Report

Nifty SAR trading system has a consistent performance with very low drawdown. Monte Carlo simulation also shows impressive results, with less than 10% chances of failures.

Parameter	Value
	Nifty
Initial Capital	200000
Final Capital	1311059.26
Scrip Name	NSE Nifty
Backtest Period	01-Jan-2004 to 25-Sep-2017
Timeframe	Daily
Net Profit %	555.53%
Annual Return %	15.45%
Number of Trades	556
Winning Trade %	34.35%
Average holding Period	4.33 periods
Max consecutive losses	14
Max system % drawdown	-22.18%
Max Trade % drawdown	-5.98%

Download the detailed backtest report here.

Equity Curve

The equity curve is consistent and almost linear

Profit Table

Additional Amibroker settings for backtesting

Goto Symbol–>Information, and specify the lot size and margin requirement. The below screenshot shows lot size of 75 and margin requirement of 10% for NSE Nifty:

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