Parabolic SAR Technical IndicatorParabolic SAR Technical Indicator
📜 The Parabolic SAR (Stop and Reverse), first introduced in 1978, is a technical indicator used to identify potential trend reversals in financial markets. It is represented as a series of dots placed above or below the asset’s price. The key concept behind the Parabolic SAR is that the price follows a parabolic movement until a trend reversal occurs.
📊 When the SAR points are below the price, it indicates an uptrend. Conversely, when the points are above the price, it suggests a downtrend. If the price touches or surpasses the SAR, a reversal signal is generated, and the dots switch position. This can help traders identify potential changes in market direction.
📈 This indicator is most effective in trending markets. However, in sideways or directionless markets, the Parabolic SAR tends to generate false signals, which can lead to confusion. Therefore, its best application occurs in well defined bullish or bearish markets.
🧮 Functionality and Mathematics
▪️ The Parabolic SAR falls under the category of trend-following indicators. Unlike oscillators, which try to predict price changes, focuses on confirming the current market direction, helping traders capitalize on extended market moves.
🤖 Mathematically, is based on a formula that adjusts its value according to price and time. The calculation incorporates two key variables
1️⃣ EP Extreme Point🟰 The highest or lowest point reached during the current trend.
2️⃣ AF Acceleration Factor🟰 Starts at a low value, like 0.02, and increases in fixed increments each time the price reaches a new high or low.
🚀 In essence, the Parabolic SAR measures the trend’s acceleration, dynamically adjusting its values to follow the price.
👨🏫 Considerations
▪️ Parabolic SAR is part of traditional technical analysis and is widely mentioned in J. Welles Wilder’s book New Concepts in Technical Trading Systems. While useful for identifying trends, it is less effective in markets where the price consolidates, as it tends to generate more false positives, which can create confusion.
▪️ Other examples of trend following indicators include moving averages simple or exponential and the MACD.
🧐 Have you heard of this indicator? Which do you consider an essential one?
