The Parabolic SAR (Stop and Reversal) indicator is a trend following indicator.
This indicator is very similar to the SuperTrend, but the SuperTrend is better as a trend follower indicator.
The SAR is displayed with dots. The dots are below or above prices, thus providing immediate and simple trading signals:
- When the dots are below prices, the SAR is in a long position and indicates that there is an upward trend in the market.
- When the dots are above prices, the SAR is in a short position and indicates that there is a downward trend in the market.
How to Calculate – Formula
If the trend is upward, the extreme price is the highest price recently reached by prices, while if the trend is downward, the extreme price is the lowest price recently achieved by prices.
The acceleration factor (0.02, with a maximum of 0.20) determines the distance of the SAR from the prices.
The complete formula is:
SAR(tomorrow) = SAR(today) + FA × (PE – SAR(today))
The extreme price indicates the highest or lowest price level achieved in the direction of the trend.
The acceleration factor affects SAR positioning.
The more the trend extends, the more the acceleration factor brings the Parabolic SAR value closer to the price trend.
The SAR, therefore, allows you to follow the rise and fall of prices at a distance.
It will enable you to remain in position until there is an opposite movement of a specific significance.
How to use the Parabolic Sar
The value of the SAR indicates:
The trend will remain bearish until prices drop above the Parabolic Sar level
As long as prices stay above the SAR, the trend continues positive.
A descent below the SAR provides a downward reversal signal.
The trend will remain bullish until prices drop below the Parabolic Sar level
As long as prices remain below the SAR, the trend continues negative.
A climb above the SAR provides an upward reversal signal.
One of the main features of SAR is that it always has a position on the market.
From this point of view, therefore, the trader who follows his instructions always has an open position.
Parabolic SAR and Market Trend
If the market is bullish, the SAR follows the rise in prices and remains in the long position until a reverse signal occurs, which turns the SAR in the short position.
If the market is bearish, the SAR follows the price drop and stays in the short position until a reverse signal occurs, which turns the SAR in the long position.
SAR is never flat, meaning it always has a position (long or short) on the market.
Parabolic, rather than providing market entry signals, is often used as a trailing-stop indicator.
When the market begins to rise during a long trade, we can maintain the position until prices fall sharply below the Parabolic SAR value.
The indicator is initially well below prices but progressively approaching them.
To intercept the first signs of weakness and provide an output signal able to protect a part of the profits made.
When the market begins to fall during a short trade, we can maintain the position until prices rise sharply above the Parabolic SAR value.
The indicator is initially well above prices but progressively approaching them.
To intercept the first recovery signals and provide an adequate exit signal from the short position.
The Parabolic SAR is a trend following indicator, so it provides trading signals when there is a strong directional trend on the market.
Unfortunately, during the lateral phases of oscillation, it offers too many false signals.