What it is and how to use it
What is it?
The Parabolic SAR (Stop and Reverse) is a trend-following indicator that provides potential entry and exit points. It is displayed as a series of dots placed above or below the price, depending on the trend direction. When the trend is upward, the dots are below the price; when the trend is downward, the dots are above the price. The Parabolic SAR is designed to identify potential reversals in the market by switching positions from long to short or vice versa.
Who made it?
The Parabolic SAR was developed by J. Welles Wilder, Jr., and introduced in his 1978 book "New Concepts in Technical Trading Systems."
How is it calculated?
The Parabolic SAR is calculated using the following steps:
Determine the initial SAR value.
Calculate the Extreme Point (EP), which is the highest high or lowest low over the period.
Calculate the Acceleration Factor (AF), which starts at 0.02 and increases by 0.02 with each new EP up to a maximum of 0.20.
Calculate the SAR for each subsequent period using the formula:
SARnext=SARcurrent+AF×(EP−SARcurrent)SARnext=SARcurrent+AF×(EP−SARcurrent)
How do you use it?
The Parabolic SAR can be used in several ways:
Trend Identification:
Use the position of the SAR dots relative to the price to determine the trend. If the dots are below the price, it indicates an uptrend; if they are above the price, it indicates a downtrend.
Entry and Exit Points:
The Parabolic SAR provides potential entry and exit points by indicating when the trend likely reverses. When the dots switch from below to above the price, it suggests selling or shorting, and when they switch from above to below, it suggests buying.
Stop-Loss Placement:
The SAR value can be used as a dynamic stop-loss level, adjusting with the trend to lock in profits and limit losses.
FAQ
Q: Is Parabolic SAR a leading or lagging indicator?
A: Parabolic SAR is a lagging indicator. It helps you determine the direction of the trend and potential reversal points by placing dots above or below the price.
Q: What are the best settings for Parabolic SAR?
A: The default settings for Parabolic SAR are a step of 0.02 and a maximum of 0.2. You can adjust these settings based on your trading strategy.
Q: How can Parabolic SAR be used to improve trading?
A: Parabolic SAR can help you set trailing stop-loss levels and identify potential trend reversals, making it a useful tool for managing risk and maximizing profits.
Strategies using Parabolic SAR
None so far.
Comments