The Parabolic SAR is used to determine potential reversals in the trend. It also gives traders information on the direction of a trend.
SAR refers to stop and reverse. This is a trailing stop and reverse method that traders used to determine when to enter the market and when to exit.
Like many other indicators in its category, the Parabolic SAR gives good results to traders in a trending environment. However, if the trend isn’t clear, traders cannot rely on this indicator to make decisions.
This indicator can be used to set trailing stop-loss orders. In any situation, the Parabolic SAR should be used along with other indicators to give a clearer idea of the direction of the trend.
Calculation of Parabolic SAR Indicator
The value of the parabolic SAR goes up if the price if the current bar is higher than that of the previous bullish bar. The indicator value will also approach the price quickly if the price is growing or sinking quickly. In fact, if the ACCELERATION factor doubles, the price and the graph of the parabolic SAR will start to come together.
The following formula is used to calculate Parabolic SAR:
SAR(i) = SAR(i-1)+ACCELERATION*(EPRICE(i-1)-SAR(i-1))
These symbols are used in the Parabolic SAR indicator formula:
SAR(i-1) – is the value of the indicator on the previous bar;
ACCELERATION – is the acceleration factor; EPRICE(i-1) – is the highest (lowest) price for the previous period (EPRICE=HIGH for long positions and
EPRICE=LOW for short positions).