Parabolic SAR is a technical indicator that is used by many market traders to define the direction of an asset’s momentum and the point in time when this momentum has a probability of switching directions that is higher by the normal one. The abbreviation of this indicator means Parabolic Stop and Reversal. It was designed and developed by the famous technician Welles Wilder. He introduced his invention in 1978 in the book New Concepts in Technical Trading Systems. This book also enlists of RSI, Average True Range and the Directional Movement Concept (ADX). Although it was developed before the computer age, Wilder’s indicators have stood the test of time and are still very popular.
The indicator gives clear levels where securities are set to have a change in trend. Many market participants use the Parabolic SAR as a trailing stop for open positions. The indicator appears as dots on the same scale as the price chart.
It should be noticed that the dots is used by traders to generate transaction signals that depend on where the dot is placed relative to the asset’s price. A dot, which appears under the price have a bullish signal, making traders to expect the momentum to keep its upward direction. Analogically, a dot, which stays over the prices indicates that the bears are in control and that the momentum will probably keep its downtrend.
The Parabolic SAR is calculated nearly independently for each trend in the price. At each step within a trend, the SAR is calculated one period in advance. That is why, SAR value for the next day is built using data available today. The general formula used for this is:
Where SARn and SARn+1 shows the current period and the next period’s SAR values, respectively.