Parabolic SAR

The Parabolic SAR A trading technique introduced by J Wells Wilder, is used by many analysts because of its adaptability and often referred to as the SAR system or (Stop and Reverse).

This time price system never backs up, so in a trending market as long as the market is long the Parabolic dots will remain below the candles and in a short market the Parabolic dots will remain above the market. The speed of the market will determine the acceleration factor of the dots.

The SAR can be useful in determining where a trend might end because the system places dots on the chart that indicate potential reversal points. When the dots shift from below the candles during an uptrend, to above the candles, a possible trend reversal is indicated. When the dots shift from above the candles in a down trend, to below the candles, a possible trend reversal is indicated.

The above chart shows the Parabolic dots above the candles in the big down move. When the candles cross through the dots at the bottom of the chart we exit the trade. On the right of the chart the long trade is signalled when the candles cross long through the dots and the SAR dots appear at the bottom of the candles.

This indicator works best in a trending market and because of its visual display it is one of the easiest indicators to use. I have explored indicators that tell us when to get into the market, which is essential to any trading system. It is however equally important to have a good exit strategy.

The Parabolic SAR is the ideal indicator to identify trade exit points. Finding suitable stop loss positions can sometimes be a challenge. With the SAR, guess work is eliminated and you will always know exactly where to place a stop, which will decrease as volatility decreases enabling you to lock in profits. It also allows plenty of room for market corrections without closing your positions unnecessarily.


The above chart shows 2 trades, one long and one short. I have used other indicators as filters to help find entry points for the trades. As the SAR assumes the market is always going up or down, even in a sideways market, filters help to determine the start of a new trend.

For the above trades I used a trend line break, a support line break, a laguerre filter line and stochastic histogram to confirm that price had broken out of the consolidation and was about to break short. The blue hi-lites show the SAR reversal points for the entry and the orange hi-lites the trade exit points.

As price dropped on the short trade, so the parabolic dots followed the market down, allowing us to move our stops along with the market and lock in our profits. Each new dot represented a new stop loss point until the candles crossed long through the SAR dot indicating the end of the down move. The same criteria was used for the long trade.

The SAR is also particularly useful for long term positions allowing you to lock in profits daily on the last SAR dot with only a brief look at the charts.

In a flat or volatile whipsaw market this is definitely an indicator to ignore as the Parabolic SAR assumes price is always going up or down creating many false entries.

As with most indicators the SAR is best used with a filter, like an oscillator, even a trend line or moving average will act as useful filters.

Summary

• Parabolic SAR is one of the easiest indicators to use.
• It is ideal for identifying stop loss points and locking in profit.
• The SAR also identifies the exit point for trades.
• Best used in trending markets.