Parabolic SAR

Definition

The Parabolic SAR indicator (Parabolic Stop and Reverse, abbreviated as SAR) is a trend-following technical indicator with minimal lag, developed by Welles Wilder. It is primarily used to identify the direction of price trends and potential reversal points.

Components and Calculation

• Extreme Point (EP): In an uptrend, the EP is the highest point; in a downtrend, the EP is the lowest point.

• Acceleration Factor (AF): AF is an incremental value used to accelerate the movement of the SAR point, reflecting the acceleration or deceleration of the price trend.

The calculation of the Parabolic SAR is based on the previous period's SAR value and the Initial Extreme Point (EP). With each new period, the EP and Acceleration Factor (AF) are adjusted according to market dynamics to reflect changes in the price trend.

The formulas are as follows:

• Uptrend: SAR = Previous SAR + AF × (Previous EP - Previous SAR)

• Downtrend: SAR = Previous SAR - AF × (Previous SAR - Previous EP)

How to Use the Parabolic SAR Indicator?

• Open long when the price is below the SAR.

• Open short when the price is above the SAR.

• Use SAR as a stop-loss point to limit losses and protect profits sensitively.

Parameters of the Parabolic SAR

• Acceleration: Measures the initial speed of trend changes. It increments each time a new high or low is reached; otherwise, the previous value is retained.

• Acceleration Limit: The maximum value beyond which the Acceleration will no longer increase.

Advantages and Disadvantages of the Parabolic SAR

Advantages:

• Captures Long-Term Trends: In stable trending markets, the SAR indicator continuously follows the price and captures long-term trends, helping traders to enter and hold positions early in the trend.

• Indicates Trend Strength: The distance between points can indirectly measure the current trend's strength, helping traders judge whether the trend is about to reverse or continue.

Disadvantages:

• Risk of False Signals: The SAR indicator is very sensitive and can generate false signals during market consolidation or high volatility, leading to frequent trades, increased trading costs, and potential losses.