It is an indicator that traders use to determine trend directions and potential reversals in the price of a security. Developed by J. Welles Wilder, it is known as Stop and Reverse system. A price-and-time-based trading system, the Parabolic SAR aims to identify potential reversals in the price movement of traded assets.
In This Article
What is Parabolic SAR?
How To Analyze Chart Using Parabolic SAR
Category
Trend
Type
Lagging
Parabolic SAR is a technical indicator that uses a trailing stop and reverse method called ‘SAR’ to identify suitable entry and exit points. It gives an edge to the traders by highlighting an asset’s direction. This indicator primarily works in trending markets. As per Wilder, traders should first establish a trend’s direction using the Parabolic SAR and then move on to alternative indicators to measure the strength of the trend. A riveting aspect of this indicator is that it assumes that traders are fully invested in a position at all points in time.
The Parabolic SAR appears on a chart as a series of dots, either below or above an asset’s price. Its placement depends on the direction in which the price moves.
In most cases, when these dots are placed above the price, it signals a downward trend. Traders can see this as a sell signal. Conversely, when these dots are placed below the price, the chart shows an upward trend. Traders can see this as a buy signal.
When the dots flip, it indicates that a potential change in price direction is underway. Besides, if the price of the security rises, the dots also rise. That is, the pace accelerates with the trend. The SAR starts to move slightly faster as the trend develops. Soon, the dots catch up to the price.