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The Parabolic Time/Price System, developed by Welles Wilder, is used to set trailing price stops and is usually referred to as the 'SAR' (stop-and-reversal). It is an indicator that is a very useful and accurate tool during a trending period. Parabolic SAR should only be employed in trending markets - when it provides excellent entry and exit points. It is plotted in a rather unorthodox fashion: a stop loss is calculated for each period using the previous periods data. The advantage is that the stop level can be calculated in advance of the market opening. Three keep concepts are necessary for the calculation: A periodic 'extreme point' which occurs when the instrument makes a new high or low, significant
point, and an 'acceleration factor'. Extreme Point: This is the highest price recorded for the day during a long trade or the lowest
price recorded for the day during a short trade. Significant Point: The SP is the highest price reached in a long trade or the lowest price reached in a short trade. It is equal to the extreme point when a trade is closed. Acceleration Factor: The Acceleration Factor starts at 2% for a new trade and increases by 2% on each period that a new extreme point is reached. The maximum acceleration factor is 20%. No further increases are made after this figure has been reached. SAR Calculation
Parabolic
SAR' is an indicator that is very useful during a trending period.
It sets trailing price stops for long or short positions. SAR stands
for 'stop and reverse'. The term 'parabolic' that resembles a parabola
comes from the shape of the curve created on the technical chart.
Parabolic SAR is called a reversal system that is used to decide
stop point & to estimate when to reverse a position & trade
in the opposite direction. It is an outstanding indicator commonly
used day trading to provide exit point.
The first entry point on the buy side occurs when the most recent high price of an issue has been
broken and it is at this time that the SAR is placed at the most recent low price. As the price of
the instrument rises, the dots will rise as well, first slowly and then picking up speed and
accelerating with the trend. It is understood that Wilder built-in this accelerating system to allow
the trader to watch the trend develop and establish itself. The SAR starts to move a little faster
as the trend develops and the dots soon catch up to the price action of the issue you are
following. Usage: The Parabolic SAR provides excellent exit points. You should close long positions when the
price falls below the SAR and close short positions when the price rises above the SAR. If long (i.e., the price is above the SAR), the SAR will move up every period, regardless of the
direction the price is moving. The amount the SAR moves up depends on the amount that prices
move. Parameters Minimum acceleration factor (Min AF): The values used for initializing and stepping the
acceleration factor (AF). It is also called initial/Incremental step. The default is set to .02 Maximum Acceleration factor (Max AF): - The maximum value that can be used for the acceleration factor (AF). The default is set to .2
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