- Type of Indicator: Trend-following
- Creator: J. Welles Wilder, Jr.
- When Created: 1978
- First Mentioned In: New Concepts in Technical Trading Systems
What Is The Parabolic SAR (Stop and Reverse)?
The Parabolic SAR, or Stop and Reverse, is a trend-following technical analysis tool created by J. Welles Wilder Jr. It is used to identify potential reversals in price movement and to provide stop-loss signals.
The tool is plotted on a chart as a series of dots, either above or below the price bars, and is designed to trail the price movement of a security.
The SAR dots initially rises or falls in line with the price movement of a security, but then begins to accelerate as the trend continues, creating a parabolic shape. When the price movement reverses, the SAR dots flip to the other side of the price bars and begins to trail the new trend.
How Do You Read The Parabolic Stop and Reverse?
The Parabolic SAR provides traders with information about potential reversals in price movement and provides stop-loss signals.
When the dots are below the price bars, it indicates a potential uptrend, and when the dots are above the price bars, it indicates a potential downtrend.
How Does The PSAR Work?
The Parabolic SAR works by initially rising or falling in line with the price movement of a security, but then begins to accelerate as the trend continues, creating a parabolic shape. When the price movement reverses, the SAR flips to the other side of the price bars and begins to trail the new trend.
How Is The Parabolic SAR Calculated?
The Parabolic SAR is calculated based on the current and previous periods’ highest high and lowest low and a factor known as the acceleration factor (AF).
The initial AF is set to 0.02 and increases by 0.02 each time a new extreme is reached, up to a maximum of 0.20.
How Do You Use The Parabolic Stop And Reverse?
Trend Identification: The Parabolic SAR can be used to identify potential uptrends or downtrends in a security. When the dots are below the price bars, it indicates a potential uptrend, and when the dots are above the price bars, it indicates a potential downtrend.
Stop-Loss Signals: The tool can also be used to provide stop-loss signals. Traders can set their stop-loss orders at the level of the SAR dots, which will move up or down as the trend continues.
Additional Trading And Risk Management Tips
Combine the Parabolic SAR with other technical indicators or chart patterns to improve the accuracy of your trading signals and create a more comprehensive trading strategy.
Be patient and wait for the SAR dots to signal a potential trend reversal before entering a position, as false signals can occur in choppy or sideways markets.
Adjust the acceleration factor of the Parabolic SAR to suit your specific trading style and the market you are analyzing. Higher values will make the tool more sensitive to price changes, while lower values will make it less sensitive.
Use proper risk management techniques to protect your investments, and always consider other factors in addition to the Parabolic SAR when making trading decisions.
Be aware that the Parabolic SAR is a lagging indicator, which means it reflects past price movements and may not accurately predict future price movements. Therefore, use it in conjunction with other technical analysis tools to make more informed trading decisions.
Monitor the Parabolic SAR for changes in direction or for dots flipping to the other side of the price bars, which can signal potential trend reversals or changes in market direction.
Consider using the SAR to identify potential support and resistance levels or trendlines, which may help confirm potential entry and exit points or to identify areas of confluence.
Finally, practice using the Parabolic SAR on historical data, demo trading accounts, or TradingView to evaluate its effectiveness for your specific trading style and market conditions before incorporating it into your live trading strategy.