Parabolic SAR
The parabolic SAR indicator, developed by J. Wells Wilder, is used by traders to determine trend direction and potential reversals in price. The indicator uses a trailing stop and reverse method called "SAR," or stop and reverse, to identify suitable exit and entry points. Traders also refer to the indicator as to the parabolic stop and reverse, parabolic SAR, or PSAR.The parabolic SAR indicator appears on a chart as a series of dots, either above or below an asset's price, depending on the direction the price is moving. A dot is placed below the price when it is trending upward, and above the price when it is trending downward.
Definition: The Parabolic SAR (Stop and Reverse) indicator, developed by J. Wells Wilder, is a technical analysis tool used to help traders determine trend direction and potential price reversals. The indicator displays a series of dots on a chart, positioned above or below the asset price depending on the direction of the price movement. When the price is rising, the dots are below the price; when the price is falling, the dots are above the price.
Origin: The Parabolic SAR indicator was first introduced by J. Wells Wilder in 1978 in his book 'New Concepts in Technical Trading Systems.' Wilder developed this indicator to help traders find suitable entry and exit points in trending markets.
Categories and Characteristics: The Parabolic SAR indicator has the following key characteristics:
- Trend Following: The indicator tracks price trends by displaying a series of dots on the price chart, helping traders identify the current market trend.
- Stop and Reverse: The core of the Parabolic SAR is the 'Stop and Reverse' mechanism, where the position of the indicator dots changes when the price reverses, signaling traders to adjust their trading strategy.
- Simplicity: The Parabolic SAR indicator is easy to understand and apply, making it suitable for beginners.
Specific Cases:
- Case 1: Suppose a stock's price is continuously rising, and the Parabolic SAR indicator dots are positioned below the price, signaling traders to hold long positions. When the price starts to fall and breaks through the SAR dots, the dots shift above the price, signaling traders to sell or short.
- Case 2: In the forex market, if a currency pair's price is continuously falling, the SAR dots are positioned above the price. When the price reverses and breaks through the SAR dots, the dots shift below the price, signaling traders to buy or close their positions.
Common Questions:
- Q: How does the Parabolic SAR indicator perform in a ranging market?
A: In a ranging market, the Parabolic SAR indicator may generate more false signals as the price frequently reverses, causing the indicator dots to switch positions frequently. - Q: How can I adjust the parameters of the Parabolic SAR indicator?
A: The main parameters of the Parabolic SAR indicator are the Acceleration Factor (AF) and the Maximum Value (Max Value). Traders can adjust these parameters based on market volatility and their trading style to optimize the indicator's performance.
