The Parabolic Stop-and-Reservse (PSAR) is a trend indicator, intended to capture reversal signals and show entry and exit points. The PSAR is bullish when the PSAR is below the candle body (usually indicated by a dot) and bearish when the PSAR is above the candle body. The PSAR generally only moves in the direction of the trend, making it useful for markets with an upward or downward trend, as well as swing markets. It is weaker when the market it sideways, as it can be prone to frequent flips (bull-to-bear or vice versa) in markets where a predominant trend is not present.

In order to combat the tendency for rapid swings in the PSAR, it is commonly paired with a second indicator. Often, this is a moving average (MA) to confirm the PSAR signal. Here is a common example:
  • PSAR + 2 EMAs: A trade would consider entering long when the PSAR is bullish and the fast EMA is above the short EMA .
  • PSAR + 3 EMAs: As above, but the trader could also add a very long EMA (200, for example) and use that as an additional filter.

In addition to using EMA , other MAs can be used and may be more appropriate to certain instruments and timeframes. Using TEMA , for example, may result in less lag but introduce more noise. Likewise, the Ehler's MAMA is an option.

Some traders use other indicators as PSAR confirmation signals, such as the relative strength index ( RSI ) on on-balance volume (OBV). The strategy is similar:
  • bullish PSAR + RSI oversold = consider long entry
  • bullish PSAR + OBV oscillator > 0 = consider long entry

The strategy presented here is based on my PSAR + EMA + TEMA study. Any of the above strategies are supported by this script:

1. The PSAR is the primary signal.
2. Confirmation is provided by any of the following: EMA , TEMA , Ehler's MAMA , RSI , or OBV.
3. You may use a third EMA (set to 200 as the default) to filter entries -- if used, the strategy will only show signals if the price is above the third (additional) EMA .

For example, a normal long signal would be a bullish PSAR + fast EMA > slow EMA + price > ema 200.

In addition, you may use a SL, which is set to the PSAR dots shown. You may also limit the backtesting dates. (Please note in the chart above, I do not have a limit on the trading dates. I believe this exaggerates the success of the strategy, but the house rules demand I not limit the timeframe to show you a more accurate picture.)
Open-source script

In true TradingView spirit, the author of this script has published it open-source, so traders can understand and verify it. Cheers to the author! You may use it for free, but reuse of this code in a publication is governed by House Rules. You can favorite it to use it on a chart.

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