The The parabolic SAR, or parabolic stop-and-reversal, is an ind... More, or parabolic stop-and-reversal, is an indicator used to determine entry and exit points by showing potential reversals in What are value stocks? A value company is a company that app... More movement.
A sell signal occurs when the dots appear above theand a buy signal occurs when the dots appear below the candles.
At the beginning of a new What is a market trend in trading? A market trend is the ten... More, the stop loss has to be more generous to absorb the What is price? The price is the measure of the value of good... More movement. When the trend is developing, the stop loss has to be adjusted and trailed behind, as new dots appear.
It is important to note that parabolic SAR is only effective in trending markets. In ranging markets, the indicator will be too slow to catch the price movement effectively because it is still a trend-following (and therefore lagging) indicator.
The parabolic SAR is calculated one period in advance, using the following formula:
SAR n+1 = SAR n + a (EP – SAR n)
“SAR n” is the SAR of the current period and “SAR n+1” is the SAR of the next period.
EP is the highest value reached during the current What is a trader? A trader is a person who buys and sells... More; the default is 0.02. Each time a new EP is reached, the initial a is added to the current a — in other words when a = set to 0.02 the first time a new EP is reached a will become a + 0.02 = 0.04, then when a new EP is reached it will become 0.06 and so on. To prevent it from becoming too large, the EP is capped. The cap can be set by the trader as well and has a default of 0.20.or the lowest value when in a . a is the acceleration factor and can be chosen by the
There are, however, two cases when the calculation of the SAR will differ from the value calculated with the formula above.
- If the value of the SAR n+1 is lower than SAR n in an What are uptrends in trading? When the price of an asset o... More or higher in a What is a downtrend in trading? When the price of an asset... More, SAR n+1 will be set equal to SAR n.
- When the price of an asset becomes equal to the SAR, a new trend is detected and the calculation is reset. When this happens the first SAR will become equal to the EP of the trend before the trend that has just ended. EP will be set to the maximum of the new trend and a will also be reset to its initial value.
Learn more about the parabolic SAR: