Definition:

The Parabolic Stop and Reversal or Parabolic SAR technical indicator was developed by J. Welles Wilder who also created the RSI and DMI indicators. Usually displayed as a chart overlay indicator, Parabolic SAR helps traders set trailing stops during trending markets.

The Parabolic SAR indicator is related to Moving Averages, but it moves with a higher acceleration rate and can “turn” or switch position above and below the price. When the Parabolic SAR is below the market that indicates an upwards trend, and when it is below the market that indicates a downward trend prevails.

Whenever the market price moves over the Parabolic SAR dots, the indicator turns and starts accumulating values on the other side of the price. The starting point for such turns becomes the high or low price for the preceding period. Also, due to its acceleration factor, the faster the price rises or falls, the faster the Parabolic SAR indicator moves toward the price action.

Sample Chart:

Usage:

Parabolic SAR seems to be more popular among traders for setting stops than for indicating what trend direction prevails. In fact, Wilder recommended establishing the trend direction first, and then using Parabolic SAR to help follow it. When the trend moves upward, you can use the indicator to signal a buy as soon as it turns under the price. Conversely, when the trend moves downward, it will signal a sell trade as it moves up over the price.

The turn of the Parabolic SAR indicator signals the end of the prevailing trend and its possible reversal.

Many traders use the Parabolic SAR to indicate suitable exit points for trend-following systems. Often, they will close a long position when the price moves below the SAR line, while shorts get closed if the price rallies over the SAR line. In this case, the indicator basically serves as a useful signal of where to execute trailing stops.

Calculation Method:

Define:

• n= the number of the time period bar in question.
• High(n)= The high price traded during time period n.
• Low(n)= The low price traded during time period n.
• SAR(n-1)= the value of the SAR for the previous bar before bar n.
• Acceleration = the acceleration factor.
• Eprice(n-1)= the highest or lowest price for the previous period
• Eprice(n)= High(n) for long positions or Low(n) for short positions.

Calculate:

• SAR(n) = SAR(n-1)+Acceleration*[Eprice(n-1)-SAR(n-1)]

Practice Parabolic SAR Trading

Technical analysis is a demanding skill that requires practice to master. We recommend that you use a demo account to train yourself for free before applying your skills to real money trading.
Most reputale trading platforms today (for example: GFC Trader, AVA Trader, Meta Trader) feature technical indicator functions which can be applied on real-time charts. You can open a free account, download the trading software and start sharpening your technical analysis skills today!

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