Introduction to Parabolic SAR
Parabolic SAR seeks to give traders an edge by highlighting the direction of an asset's movement and providing entry and exit points. In this article, we will discuss the basics of this indicator and show you how to incorporate it into your trading strategy. We will also look at some of the downsides of the indicator.
Parabolic SAR indicator explained.
The Parabolic SAR, or Parabolic Stop and Reverse, not only helps identify trends, but also tells you, as the full name suggests when to close your trade and reverse the direction. Sounds pretty useful, doesn't it?
Parabolic SAR is one of a series of business techniques developed by J. Welles Wilder, a commodities trader, and influential technical analyst.
In his book "New Concepts in Technical Trading Systems" he presented some of the cornerstones of modern technical analysis methods, including the Average True Range (ATR), the Relative Strength Index (RSI), and what he called "the parabolic time / price ". System'. This last point is the indicator we will focus on, the Parabolic SAR indicator.
The indicator draws a line on a price chart that describes the potential stop and reversal levels. The shape of this pattern reminded Wilder of the parabolic curve of classical geometry and mechanics, hence the name of the indicator.
Calculating the Parabolic SAR
As mentioned above, the indicator shows stop and reversal levels on the chart. These are calculated from the parabolic SAR formula, which is as follows:
SARNEW = SARCURRENT + AF x (EPCURRENT - SARCURRENT)
The terms of the formula are defined as follows:
AF = Acceleration factor: a changing value that increases in fixed steps for each period in which a new high is reached (for long positions or a new low for short positions) to trade. Wilder suggested a value of 0.02 for the initial AF value, which would then increase in 0.02 steps until reaching a maximum value of 0.20.
EP = Extreme Point: the highest or lowest price for the duration of the current trend (higher for an uptrend, lower for a downtrend).
Advantages and Disadvantages of Parabolic SAR
The main advantage of the indicator is that during a strong trend, the indicator highlights this strong trend and keeps the trader in the movement of the trend. The indicator also issues an exit if there is any movement against the trend that may indicate a reversal. Sometimes it is a good exit because the price is reversed. In other cases, it is not a good exit because the price immediately begins to move in the direction of the trend again.
The main disadvantage of the indicator is that it provides little analytical information or good trading signals in lateral market conditions. Without a clear trend, the indicator will constantly change above and below the price. This type of price movement can last all day. So if a day trader relies solely on Parabolic SAR for trading signals, it could be a big losing day.
For this reason, it is recommended that traders learn to recognize the trend, by reading the price action or using another indicator, so that they can avoid trades when there is no trend and close trades when there is a trend.