What is Parabolic SAR ?

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The parabolic SAR indicator, developed by J. Wells Wilder, is used by traders to determine trend direction and potential reversals in price. The indicator uses a trailing stop and reverse method called "SAR," or stop and reverse, to identify suitable exit and entry points. Traders also refer to the indicator as to the parabolic stop and reverse, parabolic SAR, or PSAR.The parabolic SAR indicator appears on a chart as a series of dots, either above or below an asset's price, depending on the direction the price is moving. A dot is placed below the price when it is trending upward, and above the price when it is trending downward.

Definition

The Parabolic SAR indicator, developed by J. Wells Wilder, is used by traders to determine trend direction and potential price reversals. SAR stands for 'Stop and Reverse,' and the indicator identifies suitable exit and entry points by displaying a series of dots on a chart. These dots are positioned above or below the asset price depending on the direction of price movement: below the price when it is rising, and above when it is falling.

Origin

The Parabolic SAR indicator was introduced by J. Wells Wilder in 1978 in his book 'New Concepts in Technical Trading Systems.' Wilder, a renowned technical analyst, developed several widely used technical indicators, including the RSI (Relative Strength Index) and ATR (Average True Range). The Parabolic SAR was designed to help traders identify potential reversal points in trending markets.

Categories and Features

The Parabolic SAR is primarily used in trending markets to identify reversal points. Its main feature is the representation of trend direction changes through a series of dots. Advantages include its simplicity and intuitive visual representation, but it may produce misleading signals in sideways markets. Traders often combine it with other indicators to improve accuracy.

Case Studies

Case 1: In 2018, Apple Inc.'s stock price experienced a significant upward trend. Using the Parabolic SAR, traders were able to identify multiple entry points during the price rise and exit timely when the trend reversed. Case 2: In 2020, Tesla, Inc.'s stock price was highly volatile. The Parabolic SAR helped traders identify sell points during price declines, avoiding larger losses.

Common Issues

Common issues investors face when using the Parabolic SAR include misleading signals in sideways markets and difficulty in accurately identifying reversal points in highly volatile markets. To mitigate these issues, it is recommended to use the Parabolic SAR in conjunction with other technical indicators, such as moving averages or RSI.

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Liquidity Trap

A liquidity trap is an adverse economic situation that can occur when consumers and investors hoard cash rather than spending or investing it even when interest rates are low, stymying efforts by economic policymakers to stimulate economic growth.The term was first used by economist John Maynard Keynes, who defined a liquidity trap as a condition that can occur when interest rates fall so low that most people prefer to let cash sit rather than put money into bonds and other debt instruments. The effect, Keynes said, is to leave monetary policymakers powerless to stimulate growth by increasing the money supply or lowering the interest rate further.A liquidity trap may develop when consumers and investors keep their cash in checking and savings accounts because they believe interest rates will soon rise. That would make bond prices fall, and make them a less attractive option.Since Keynes' day, the term has been used more broadly to describe a condition of slow economic growth caused by widespread cash hoarding due to concern about a negative event that may be coming.

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Liquidity Crisis

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Liquidity Event

A liquidity event is an acquisition, merger, initial public offering (IPO), or other action that allows founders and early investors in a company to cash out some or all of their ownership shares.A liquidity event is considered an exit strategy for an illiquid investment or equity with little or no market to trade on. Founders of a firm push toward a liquidity event, and investors like venture capital (VC) firms, angel investors, or private equity firms expect one within a reasonable amount of time after initially investing capital.

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Liquid Alternatives

Liquid alternative investments (or liquid alts) are mutual funds or exchange-traded funds (ETFs) that aim to provide investors with diversification and downside protection through exposure to alternative investment strategies. These products' selling point is that they are liquid, meaning that they can be bought and sold daily, unlike traditional alternatives which offer monthly or quarterly liquidity. They come with lower minimum investments than the typical hedge fund, and investors don't have to pass net-worth or income requirements to invest. Critics argue that the liquidity of so-called liquid alts will not hold up in more trying market conditions; most of the capital invested in liquid alts has entered the market during the post-financial crisis bull market. Critics also contend that the fees for liquid alternatives are too high. For proponents, though, liquid alts are a valuable innovation because they make the strategies employed by hedge funds accessible to retail investors.

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Zero-Investment Portfolio

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