Parabolic SAR

Type

Trend Indicator – Stop and Reverse System

History

Parabolic SAR was developed by J. Welles Wilder Jr. and is described in his book “New Concepts in Technical Trading Systems”.

How does it work?

The Parabolic Time / Price System is used to set trailing price stops and is referred to as the SAR (Stop-and –Reversal).

Parabolic SAR should only be employed in trending markets - when it provides excellent entry and exit points.

You should close long positions when the price falls below the SAR and close short positions when the price rises above the SAR.

If you are long (i.e., the price is above the SAR), the SAR will move up every day, regardless of the direction the price is moving. The amount the SAR moves up depends on the amount that prices move.

Trading Signals

1.      Go long when price meets the Parabolic SAR stop level, while short

2.      Go short when price meets the Parabolic SAR stop level, while long

Settings

Sharechart Default:  6 period

Example

The daily share price for Harvey Norman (HVN) broke through the Parabolic SAR (from the downside) just above $2 and rallied to well over $3 before breaking through the Parabolic SAR (from the upside). The Parabolic SAR is the pink dotted line trailing below the share price as the share price rises. Once the share price breaks below this line it trails above the share price.

The setting for the Parabolic SAR for the graph above was 60 periods. It can be modified: go to Settings > Indicators > Parabolic SAR.