Parabolic SAR Indicator: Definition, Formula, Trading Strategies

As a technical indicator, Parabolic SAR is known as a momentum indicator and used to identify potential trend reversals when the price is in a strong uptrend or downtrend. The parabolic indicator generates buy or sell signals when the position of the dots moves from one side of the asset’s price to the other. For example, a buy signal occurs when the dots move from above the price to below the price, while a sell signal occurs when the dots move from below the price to above the price.

The stop continuously rises as long as the uptrend remains in place. In other words, SAR never decreases in an uptrend and continuously protects profits as prices advance.

How to trade using the parabolic SAR

It is used to determine when to stop and reverse a position utilizing time/price-based stops. Once a Parabolic SAR is reached, the current position is exited and a new position in the opposite direction is taken. It is primarily used in trending markets and is based on always having a position in the market. The indicator may also be used to determine stop points and estimating when you would reverse a position and take a trade the opposite direction. The indicator derives its name from the fact that when charted, the pattern resembles a parabola or French curve. The parabolic SAR provides several basic functions that include providing trend direction, entry and exit signals, and acting as a trailing stop-loss​​.

Over the years, it has evolved and is also frequently used as an entry/exit signal on its own, or in conjunction with other indicators. First, it tells you where the market is likely headed https://www.bigshotrading.info/ — this is shown as a series of dots above or below the market depending on the current trend. Secondly, it attempts to tell you at what point the current trend will likely reverse.

Parabolic SAR and stop losses

This contrast makes it easier to compare the indicator with the price action of the underlying security. Wilder recommends traders should first establish the direction of the trend using the parabolic SAR and then use alternative indicators to measure the strength of the trend. Reversal signals are also generated, eventually, regardless of whether the price actually reverses. parabolic indicator vs sar This is because a reversal is generated when the SAR catches up to the price due to the acceleration factor in the formula. Therefore, a reversal signal may get a trader out of a trade even though the price hasn’t technically reversed. He has been a professional day and swing trader since 2005. Cory is an expert on stock, forex and futures price action trading strategies.

• Trend indicators are among the most important indicators in the financial markets.
• The original intent of the Parabolic SAR was to manage risk and set stops.
• When the price passes through the dots, there is a potential trend reversal and the dots move to the other side.
• If such information is acted upon by you then this should be solely at your discretion and Valutrades will not be held accountable in any way.
• No strategy can give you a 100% win ratio so always be placing your stops at the appropriate areas.

Also, note that increasing the Step ensures that the Maximum Step will be hit quicker when a trend develops. Chart 8 shows Best Buy with a Maximum Step (.10), which is lower than the default setting (.20). This lower Maximum Step decreases the sensitivity of the indicator and produces fewer reversals. Notice how this setting caught a two-month downtrend and a subsequent two-month uptrend. This higher reading produced extra reversals in early February and early April.

Advantages and Risks of Using the Parabolic SAR Indicator

Of course, these values aren’t set in stone and can be changed as you see fit. There are a few things that you need to know when using the Parabolic SAR. Also, ensure that you leave the parameters intact. Most trading platforms provide the default settings at the start at 0.02, increment at 0.02, and maximum value at 0.2. Some day traders, however, have developed their own parameters based on their trading strategy. When holding a long position, the first sign of a red dot above the market is considered a bearish signal, and a reversal is due. This is the normal time for many to close their long position and open a short one in the same security.