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Parabolic SAR |
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The Parabolic Stop and Reversal indicator, also Parabolic Time/Price System , is a form of trend indicator overlaid in price charts. It is generally represented in the form of a dot either below or above prices indicating through such the direction of a trend with dots appearing below prices calling for a rise in prices while dots appearing above call for slipping prices.
SAR is generated based on two variables, the step and maximum step. The step controls the sensitivity of the indicator to price changes, the higher the Step the more sensitive Parabolic SAR leading to frequent fluctuations. Maximum Step in turn regulates Parabolic SAR's adjustment to price changes with lower values keeping the indicator farther from prices.
While meant to trigger buy or sell signals with the reversal of its positions, Parabolic SAR's key use is that of a trailing stop. During a rally the dots below prices are taken as self-adjusting stops while dots above prices are self-adjusting stops in a bear market.
In the preceding chart the first ellipse highlights the use of Parabolic SAR in identifying a trend and its start, the second ellipse applies its Stop-and-Reverse function while the third ellipse demonstrates the indicators use as a trailing stop.
Parabolic SAR is another Welles Wilder creation introduced in his book, New Concepts in Technical Trading. Mr. Wilder recommends establishing the trend first before applying the indicator and trading in the trends direction.
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