Parabolic SAR Explained

By mosesbet · Filed Under Spread Betting Comments Off on Parabolic SAR Explained 

Parabolic SAR for eBay

When studying markets through technical analysis, Parabolic SAR (stop and reverse) is one of the simplest technical indicators to use (it’s seriously VERY easy).  Parabolic SAR was invented by J. Welles Wilder, Jr and makes it easy to see upward/downward trends in the market.

Parabolic SAR places a series of dots on your graph above or below the candle-stick chart in a curve formation (looks almost identical to a trailing stop). If the dots are above the candle sticks then it indicates an upward moving trend and if the dots are below the candle sticks then it indicates an upward moving trend.

The exact formula for calculating Parabolic SAR isn’t very important – you don’t need to learn it.  However, if you’re interested in the formula than there’s a snapshot below:

How to Use Parabolic SAR

The advantage of the Parabolic SAR is that it’s extremely easy to use.  It indicates trends in the market, for example if the market is about to trend upwards then the dots will appear below the candle sticks curving upwards in a trend formation.  You can take advantage of this by going long once you see the 1, 2 or 3 Parabolic SAR points in a row plotted below the candle stick, or go short if you see the points above the candle stick.

You can also use the Parabolic SAR as a stop-loss (or limit) order for you trades which can be pretty useful.

The downside to the Parabolic SAR is that it only works well in trending markets.  If the market is too choppy then the trend will “whipsaw” and change direction too easily.  This will give the wrong impression of long term trends based on short term price activity.  J. Wilder stated that the Parabolic SAR only works well 30% of the time which means at least 50% of the time it won’t be suitable for most markets.

Altering the Step Increments of Parabolic SAR

Some spread betting platforms allow you to alter the SAR sensitivity by changing the Acceleration Factor (AF), also referred to as the Step.  The Step is a multiplier which influences the rate of change in SAR.  A higher step moves the SAR closer to the price which makes a trend reversal much more likely.  This makes the SAR much more responsive in the short term but also less reliable (i.e. it causes the SAR to whipsaw failing to catch the trend).

In conclusion, the Parabolic SAR is probably one of the easiest technical indicators that you can learn from.  It helps spot trends and reversals in the market whilst also providing a useful parameter for placing your trailing stop.

 

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