A Total Wealth Tactic to Trade Tesla Today

Keith Fitz-Gerald Aug 05, 2016
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Many investors believe in Elon Musk longer term but can’t bring themselves to buy Tesla right now because they fear the recently announced SolarCity buyout will cause share prices to drop.

So why not sell… then buy again?

Contrary to what many investors think, investing is not a one-way ticket. Not with Tesla, and not with any stock for that matter. You can make money as a stock moves up AND down. If you’re not trying, then you’re throwing away half your profit potential.

That sounds like a tall order but, in reality, it’s pretty simple. And today I’m going to show you how to do it using a Total Wealth Tactic that we haven’t discussed yet…

…the Parabolic SAR.

If you’ve never heard of the Parabolic SAR, you’re not alone. Very few people outside the technical trading community have, which is a shame considering how powerful a profit generator the Parabolic SAR can be.

Today we’re going to talk about what the Parabolic SAR is, how to use it, and how to line up profits on any investment when you do.

Including Tesla.

Here’s what you need to know.

The Only Indicator That Works in Any Market, At Any Time, On Any Stock

The Parabolic SAR is a very simple to use and easy to understand technical indicator developed by J. Welles Wilder who, as an aside, also developed the Relative Strength Index, or RSI for short.

In contrast to other indicators that tell you where the markets have been, the Parabolic SAR gives you a pretty darned good view of where the markets may be headed next.

What’s more, the Parabolic SAR can be used on any stock, in any time frame, and in any market.

The formula is straightforward and usually looks something like this:

formula
If you’re mathematically challenged, that’s okay. You don’t have to understand how an engine works to drive a Ferrari.

The Parabolic SAR is usually displayed as a series of dots above or below where a stock is currently trading. You can find it in dozens of stock analysis packages including ThinkorSwim, Trade Station, NinjaTrader or MetaStock Trade among others  but also for free at Stockcharts.com.

Depending on the charting package or Internet app you’re using, you can change the colors and shapes of each dot to suit your tastes.

For example, I like to display the Parabolic SAR in grey against a black background. Other traders I’ve known over the years like to put lower dots in green and higher dots in red or even change them into specific shapes like stop signs and traffic lights.

That’s really beside the point, though.

What you need to know is that the Parabolic SAR is a simple, easy to understand way to gauge a stock’s next moves and the price at which you can act for maximum profits. It’s also a great guideline with regard to whether you should be long or short at any given moment.

Let’s walk through an example using Tesla.

I’ve chosen Tesla very deliberately because it’s a controversial stock and I know that many members of the Total Wealth Family are following it closely… especially after the article I posted earlier this week.

Here’s the chart with the Parabolic SAR plotted in grey.


The Parabolic SAR works very simply.

When prices break above the most recent high price of your target stock, a dot is placed at the most recent low price. Then, assuming prices continue to rise, the corresponding dot rises, too – slowly at first, but then with increasing speed as prices climb. In effect, it draws closer to price over time.

The beauty of this is that the math works out in such a way that the dots are continually accelerating as a stock rises. That means you’ll never be caught by surprise by a correction or a reversal that devastates other investors.

Now, as you can see, the plot never stops. There’s always a Parabolic SAR dot above or below prices and that, in turn, means it’s an ongoing indicator capable of telling a story under a wide variety of market conditions that render more traditional indicators useless.

For instance, you can see the Grey Dot above yesterday’s price all the way at the right.

That tells you that Tesla’s short-term bias is down, which, given the current headlines about what a screwed up deal the SolarCity purchase is, isn’t surprising.

That is until you realize that the first SAR dot appeared early Monday and would have allowed nimble traders to take positions ahead of the bulk of the fall that caught most other folks by surprise.

And what if you’re not a trader?

No matter.

If you’re a long-term investor, the dot says one of three things at the moment – all of which potentially have a material impact on your money. For instance, depending on your individual risk tolerance: hold, “stand aside,” or capture profits from the June run off $193 a share or so.

If you’re a speculator or an aggressive investor, the very same dot is calling for a Tesla short or even buying put options to profit as prices drop.

Whenever I talk about the Parabolic SAR at presentations around the world, usually the question “for how long?” comes up right about now… as in how long do I hold short or stay out of Tesla?

Simple – until the dots reverse.

The “SAR” in Parabolic SAR actually stands for “stop and reverse,” meaning that you can trade Tesla constantly being either long or short if you want. Every dot then becomes the price at which you go short if you’re long or long when you’re short. I.e. you “stop and reverse” your position.

I particularly like this aspect of the Parabolic SAR because that makes it ideal for investors who want to establish a longer term core position then trade around it using shorter term market movement.

More advanced investors and traders frequently combine the Parabolic SAR with moving averages, chart patterns or even stochastics to develop more precise trading systems. But you don’t have to – it works just fine on its own.

What’s the catch?

For most people it’s simply that the Parabolic SAR can flip flop more often than expected under choppy market conditions. But this “catch” has an upside no one talks about – it forces them to be more active than they’d like and more disciplined than they’re capable of being.

Obviously, we’ve just scratched the surface today.

You can use the Parabolic SAR in any time frame, in any market and apply it to any stock.

There’s no guesswork required.

Even when it comes to a stock like Tesla.

Until next time,

Keith

14 Responses to A Total Wealth Tactic to Trade Tesla Today

  1. Lanier Dodson says:

    Willes Wilder? Is trying to impersonate J. Welles Wilder?

    • Will Dahl says:

      Great catch Lanier.

      Thanks for your sharp eyes…you are correct and our editing fell short today.

      Best regards and thank you for being part of the Total Wealth Family,

      William Dahl
      Associate Editor

  2. Kevin says:

    Thank you for bringing this indicator to our attention. I have played with it in the past but was never sure which settings to use for the best, most accurate results. The default settings on my charting software are (.02, .2). Which settings do you prefer to use?

    • Keith says:

      Good morning Kevin.

      The default settings are a pretty good place to start. Tuning them depends entirely on your individual investment objectives and risk. For example, some traders I know run far wider limits because they can stomach more risk before a reversal. Others want things kept on a very short leash because they are playing only in the direction of a primary trend; as such, they’d rather get bounced out of a trade 5 times than risk a single smaller loss.

      I’ll publish an article on settings that may help in the months ahead.

      Best regards and thanks for being part of the Total Wealth Family, Keith 🙂

  3. Brian says:

    How can we set up the SAR parabola on thinkorswim?

    • Keith says:

      Hello Brian.

      There’s a stock indicator in the studies listed as Parabolic SAR. Adding to your chart is simply a matter of adding a study and setting the parameters you want to use. Start off with stock though so you learn how to “read” it before hot rodding the indicator.

      Best regards and thanks for being part of the Total Wealth Family, Keith 🙂

  4. R. J. says:

    Fantastic.

    I’ve been playing around with some technical indicators at stockcharts.com, back-testing certain stocks.

    Of course, hindsight is always 20/20, wherein one can see the interplay over time. The obvious challenge is, if one has identified a trend and takes a position, the technical resources are sans a time machine.

    I like what I read and learned here.

    Please do post more articles of this nature.

    • Keith says:

      Thanks for the kind words, RJ.

      Will do!

      Best regards and thanks for being part of the Total Wealth Family, Keith 🙂

  5. Rich says:

    Keith, I think that you need to check the comments in your TSLA chart re: “buy” & “sell” signals. Your comment is the same for each one…..”when price breaks above a falling dot”. Surely, that can’t be correct.

  6. R. J. says:

    I’m confused about the graphics ‘sell’ signal pointer.

    The dots to the left and right are ascending. In the gap above are the descending dots. It would seem that the price broke above a falling dot four or five bars over.

    To confuse matters, the graphic also states that a reversal is triggered when the price breaks below the “closet dot”.

    So which dot am I looking at, anyway?

    Am I to consider that the the first dot of the next line of ascending dots to the right is actually a descending dot because it fell below the last line of descending dots above?

    Some elucidation here would be helpful.

    Thank you.

  7. Fabian says:

    I agree with you. I use MACD but I’ll check SAR too.

    • Keith says:

      Hello Fabian.

      Terrific. By the way, the MACD and SAR work well together and are a popular set up amongst technical traders.

      Best regards and thanks for being part of the Total Wealth Family, Keith 🙂

  8. Domingo Santana says:

    very interesting, I am a member of your Total W. but I have never been able to receive any information of your picks. How do I get started and become more active.

    • Jessica Sheppard says:

      Good afternoon, Domingo, and thanks for reaching out!

      Many of our Total Wealth members start off with a subscription to Keith’s Money Map Report to develop their core investments, which you can read more about here.

      If you’d like one of Keith’s more specialized publications (for still higher returns!) check out this link for more info.

      As always, don’t hesitate to contact our Customer Service department (1.888.384.8339) with questions you might have about any of our services, and thanks for being a part of Total Wealth! 🙂

      Jessica Sheppard
      Associate Editor

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