How SAR Parabolic Work

History

The Parabolic SAR (Stop and Reverse) indicator, a tool widely used in technical analysis to identify potential reversals in the price direction of a security, was developed by J. Welles Wilder Jr. In the early 1970s, Wilder introduced this indicator as part of a series of technical analysis tools to assist traders in making more informed decisions in the dynamic world of financial markets.

source: J. Welles Wilder Jr. – Wikipedia

Wilder, an American mechanical engineer, turned his attention to financial markets and technical analysis in the pursuit of creating tools that could effectively capture and interpret price trends. The Parabolic SAR, introduced in his seminal work “New Concepts in Technical Trading Systems” in 1978, represented a departure from traditional trend-following indicators.

The Parabolic SAR calculates its values based on the underlying price data and is particularly useful for traders seeking to identify potential entry and exit points in a trend. Its unique feature lies in its ability to dynamically adjust its sensitivity to changes in price movement. As the name suggests, the indicator is designed to stop and reverse its direction when the prevailing trend shows signs of weakening or reversing.

Formula

The formula for calculating the Parabolic SAR involves two primary variables: the prior SAR value and the acceleration factor.

The SAR for the current period is determined using the formula:
${\text{SAR}}_{\text{t}}={\text{SAR}}_{\text{t-1}}+\text{AF}\times (\text{EP}-{\text{SAR}}_{\text{t-1}})$SARt​=SARt-1​+AF×(EP−SARt-1​)

Here, SAR${}_{\text{t}}$t​ is the SAR for the current period, SAR${}_{\text{t-1}}$t-1​ is the SAR for the previous period, AF is the acceleration factor, and EP is the extreme point. The extreme point is the highest high for an uptrend or the lowest low for a downtrend.

The acceleration factor starts at a certain value and increases each period until it reaches a predetermined maximum. The formula for calculating the acceleration factor is as follows:
${\text{AF}}_{\text{t}}={\text{AF}}_{\text{t-1}}+\text{Acceleration}$AFt​=AFt-1​+Acceleration

Traders often use a default acceleration factor of 0.02 with a maximum value of 0.20. The accelerat
ion factor influences the sensitivity of the SAR to price movements. A higher acceleration factor leads to a quicker adjustment of the SAR to changes in trend.

It’s important to note that the Parabolic SAR is more effective in trending markets and may produce false signals in ranging or sideways markets. Additionally, traders often combine the Parabolic SAR with other technical indicators to enhance its reliability.

settings

Adjusting the parameters of the Parabolic SAR (Stop and Reverse) indicator effectively requires a nuanced understanding of its functionality and the market conditions it aims to capture. The Parabolic SAR is a trend-following indicator commonly used by traders to identify potential reversal points in a market trend. Now, let’s delve into the intricacies of optimizing its parameters.

Firstly, it’s crucial to comprehend the two key parameters involved: the acceleration factor and the maximum acceleration. The acceleration factor determines the rate at which the SAR converges towards the price, while the maximum acceleration sets a cap on this acceleration, preventing it from increasing indefinitely.

To strike the right balance, consider the prevailing market volatility. In a highly volatile market, a lower acceleration factor may be more suitable to adapt to rapid price changes. Conversely, in a less volatile market, a higher acceleration factor might be employed for a smoother response.

Historical analysis can also play a pivotal role. Examining past market data allows traders to identify periods of optimal performance for specific parameter settings. This empirical approach helps in understanding how the Parabolic SAR behaved under similar conditions, guiding the selection of appropriate parameters for future use.

interpreting Parabolic