Parabolic SAR Definition
The Parabolic SAR indicator was developed by Welles Wilder and mentioned in the book New Concepts in Technical Trading Systems. The Parabolic SAR stands for Parabolic Stop and Reversal. The indicator provides clear levels where securities are set to have a change in trend. Many traders use the indicator as a trailing stop for open positions. The indicator is plotted as dots on the same scale as the price chart.
Parabolic SAR Charting Example
Below is a charting example of Intel with the Parabolic SAR overlaid on the price chart. We normally cover the formulas that control many of the technical indicators, but the Parabolic SAR is rather complex and beyond the scope of this article. While the stock is above the indicator, traders should be long in the stock. Conversely, when the stock is below the indicator, traders should be short. In the below charting example, you will notice that the price chart will trend in one direction and then at times suddenly reverse and touch or penetrate the Parabolic SAR. During this scenario, traders will use this as an opportunity to protect profits or completely exit winning positions.
Modifying Parabolic SAR Formula settings
The Parabolic SAR is a common technical indicator in many charting applications. The two common inputs for the indicator are the (1) step and (2) limit. The step controls the sensitivity for the indicator. The higher the step setting the more signals will be generated by the indicator. The default step setting is .02. The limit is the maximum value the SAR can reach before an extreme reading is registered. The default value for the limit input is .2. The Parabolic SAR works best in trending markets, as it is a lagging indicator and will generate a number of false signals in choppy markets.