Parabolic SAR is a fantastic tool for traders looking to analyze trending markets. This technical indicator is displayed right on your price chart and acts similarly to a Moving Average. However, what sets the Parabolic SAR apart is its dynamic nature—it's more responsive and can shift its position based on price movements. In an uptrend, you’ll find the Parabolic SAR below the price, while in a downtrend, it moves above the price.
When the price crosses the Parabolic SAR lines, the indicator flips, and its new values will be located on the opposite side of the price. This flip signals a potential trend reversal or a period of consolidation. So, when you see this happen, keep your eye out for either a correction or a new trend beginning.
The Parabolic SAR is a valuable tool for identifying exit points. For long positions, you’ll want to close out when the price dips below the SAR line, while for short positions, close when the price rises above it. This means you should always be tracking the movement of the Parabolic SAR and only keeping your positions open in the direction it’s moving. Many traders also use this indicator as a trailing stop line.
If you’re holding a long position (with the price above the SAR line), the Parabolic SAR line will continue to rise no matter which way the price moves. The distance the SAR line moves is tied to how much the price is fluctuating.
Parabolic SAR indicator
How to Calculate:
For long positions:
SAR (i) = SAR (i - 1) + ACCELERATION * (HIGH (i - 1) - SAR (i - 1))
For short positions:
SAR (i) = SAR (i - 1) + ACCELERATION * (LOW (i - 1) - SAR (i - 1))
Where:
- SAR (i - 1) - value of Parabolic SAR on the previous bar;
- ACCELERATION - acceleration factor;
- HIGH (i - 1) - maximum price for the previous period;
- LOW (i - 1) - minimum price for the previous period.
The value of the indicator increases when the current price exceeds the previous highs during a bullish trend, and vice versa. The acceleration factor (ACCELERATION) doubles at that time, causing the Parabolic SAR to converge towards the price. In simpler terms, the faster the price moves, the quicker the indicator will catch up.
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