technical analyst - learn parabolic sar

Parabolic SAR

Parabolic SAR was developed by J. Welles Wilder Jr. and is described in his book New Concepts in Technical Trading Systems. SAR stands for stop and vice versa.
Parabolic SAR should only be used in the market trends - when it provides useful entry and exit points. This is plotted in somewhat unorthodox fashion: the stop loss is calculated for each day using the data the previous day. The advantage is that the quit rate can be calculated before the market opening.

    Stop level below the current price indicates that your position long. The stop will move up every day until activated (when price falls to a level stops).
    Stop level above the current price indicates that the position you are short. stop moving down every day until triggered (when the price rises to the level of stops).
Parabolic SAR: Trading Signals
Your first step is to confirm that the market is trending:

    Use a trend indicator, or
    Stop trading with Parabolic SAR if you whipsawed twice in a row starting again and after you watch an escape from the pattern graph.

A trade is indicated when the bar prices and stop intersecting levels:

    Go long when prices meet the Parabolic SAR stop level, a short time.
    Go short when prices meet the Parabolic SAR stop level, while the length.

Parabolic SAR: Setup

See Indicator Panel instructions on how to set the Parabolic SAR on the price chart. The default setting is the acceleration factor of 2% and 20% maximal step. To change the default settings - see Edit Indicator Settings.
Parabolic SAR: Evaluation

Parabolic SAR introduce some concepts very well to technical analysis but it leaves two major weaknesses:

    Trend speeds vary from time to time and among stocks. It is difficult to arrive at an appropriate acceleration factor with all the trends - it would be too slow for some and too fast for others.
    SAR system assumes that trends change every time the stop was hit. Any trader will tell you that stops you may be exposed several times while the trend continues. The price only retraces through a stop and then continued the trend-ups, leaving you behind.

Parabolic SAR formula

There are some basic concepts that need to be overcome before we can explain how the Parabolic SAR is calculated:
Extreme Point

This is the highest price recorded (to date) during a long trade or the lowest price recorded (to date) during a short trading.
Important Point

SP is the highest price achieved in a long trade or the lowest price reached in a short trade. This is the same as extreme points when trading closed.
Acceleration Factor

Acceleration factor starts at 2% for new trade and increased by 2% on each day that a new extreme point is reached. The maximum acceleration factor is 20%. No further increases are made after this figure has been reached.
Parabolic SAR: Calculation

    On day 1 of a new trade (the day that the trade is entered), Parabolic SAR is taken as a significant point from the previous trade.
    If trade Long SP will be extreme Low reached in earlier trade.
    If trade is to short the SP will be extreme height reached in earlier trade.
    To calculate the Parabolic SAR for the next day:
    Take the difference between extreme points and the SAR (on day 1) and multiply by the acceleration factor.
    If the trade length, add the result to the SAR on 1 day.
    If the trade is short, less the result of the SAR on 1 day.
    There is one exception:
    Parabolic SAR never moved in the range of current or previous day (High to Low Highest lowest in over 2 days).
    If this happened in a long trade, use the lowest Low over the 2 days as the SAR for the next day.
    If short, use the highest High for 2 days as the SAR for the next day.
    Repeat the calculation of Parabolic SAR for each of the next day, adjust the acceleration factor every time a new extreme point is recorded.
    trade is canceled when the price equals the Parabolic SAR for the day.