Parabolic SAR
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In Technical analysis, Parabolic SAR (SAR - stop and reverse) is a method devised by J. Welles Wilder, Jr, to find trends in market prices or securities. It may be used as a trailing stop loss based on prices tending to stay within a parabolic curve during a strong trend.
The concept draws on the idea that time is an enemy, and unless a security can continue to generate more profits over time, it should be liquidated. The indicator generally works well in trending markets, but provides "whipsaws" during non-trending, sideways phases. A parabola below the price is generally bullish, while a parabola above is generally bearish.
The Parabolic SAR is calculated almost independently for each trend in the price. When the price is in an uptrend, the SAR appears below the price and converges upwards towards it. Similarly, on a downtrend, the SAR appears above the price and converges downwards.
At each step within a trend, the SAR is calculated ahead of time. That is, tomorrow's SAR value is built using data available today.
The SAR is recursively calculated in this manner for each new period. There are, however, two special cases that will modify the SAR value:
- If tomorrow's SAR value lies within (or beyond) today's or yesterday's price range, the SAR must be set to the closest price bound. For example, if in an uptrend, the new SAR value is calculated and it results to be greater than today's or yesterday's lowest price, the SAR must be set equal to that lower boundary.
- If tomorrow's SAR value lies within (or beyond) tomorrow's price range, a new trend direction is then signaled, and the SAR must "switch sides."
Ricky Schmidt
February 1, 2007
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