How to use Parabolic SAR | What is this Indicator

The Parabolic SAR (Stop and Reverse) is a popular technical analysis indicator developed by J. Welles Wilder. It’s designed to provide potential entry and exit points, and to signal the direction of a trend. The indicator is called “parabolic” because, when plotted on a chart, the dots representing the SAR form a parabolic shape.

Calculating the Parabolic SAR
The Parabolic SAR is calculated using the following formulas:

• Uptrend: SAR = Prior SAR + Prior AF(Prior EP – Prior SAR)
• Downtrend: SAR = Prior SAR – Prior AF(Prior SAR – Prior EP)

Where:

• SAR = Stop and Reverse
• AF = Acceleration Factor, which starts at 0.02 and increases by 0.02 each time a new extreme point (EP) is recorded, up to a maximum of 0.20.
• EP = Extreme Point, which is the highest high in an uptrend or the lowest low in a downtrend.

Interpreting the Parabolic SAR
The Parabolic SAR is plotted as a series of dots above or below the price bars. When the dots are below the price bars, this suggests an uptrend and is a signal to buy or hold. When the dots are above the price bars, this suggests a downtrend and is a signal to sell or short.

The Parabolic SAR is also used to set trailing stop losses. In an uptrend, the SAR value can be used as a stop loss level that moves up as the price rises. In a downtrend, the SAR value can be used as a stop loss level that moves down as the price falls.

Trading with the Parabolic SAR
The Parabolic SAR can be a useful tool for traders looking to identify potential entry and exit points. Here are a few ways it can be used:

1. Trend Identification: If the Parabolic SAR dots are below the price, this indicates an uptrend. If they’re above the price, this indicates a downtrend.
2. Entry Points: A trader might consider entering a long position when the Parabolic SAR moves below the price (indicating an uptrend) and entering a short position when the Parabolic SAR moves above the price (indicating a downtrend).
3. Exit Points: A trader might consider exiting a long position when the Parabolic SAR moves above the price (indicating a potential downtrend) and exiting a short position when the Parabolic SAR moves below the price (indicating a potential uptrend).
4. Stop Loss Levels: The Parabolic SAR can be used to set a trailing stop loss. In an uptrend, the stop loss can be set at the level of the Parabolic SAR dot below the price. In a downtrend, the stop loss can be set at the level of the Parabolic SAR dot above the price.

In Conclusion the Parabolic SAR is a versatile and popular technical analysis indicator that can help traders identify the direction of a trend, potential entry and exit points, and appropriate stop loss levels. However, like all technical indicators, it’s not foolproof and should be used in conjunction with other tools and analysis techniques.

Always remember to consider your own risk tolerance and trading goals when using the Parabolic SAR or any other technical indicator.