Definition: The Parabolic Stop And Reverse (SAR) tool was designed by J. Welles Wilder. Parabolic SAR is a display of points that stop and reverse for a particular market. When the market touches or crosses a point, this indicates that the position should be reversed. In its most simplistic understanding, this means the following: if you are long, the Parabolic SAR triggers a cover-long-and-go-short reversal; if you are short, the Parabolic SAR triggers a cover-short-and-go-long reversal. The Parabolic SAR assumes that you are always in the market.
The Parabolic is designed to be a true reverse system: Every stop point is a potential reverse point. When the stop is triggered, it was originally intended to be an automatic reverse trade. However, many traders use it specifically as a stop-loss technique and ignore the reversing aspect of the Parabolic study.
How to Use: At the beginning of a move, the Parabolic SAR creates a greater distance between the price and the trailing stop. However, as the trend develops, the distance between the price and the indicator gets smaller, creating a tighter stop-loss.
In an uptrend, the Parabolic “dots” start out slower but accelerate with the trend. The stop is slow at the outset to allow the trend to develop. As price accelerates, the SAR moves faster and eventually catches up the price.
The Parabolic SAR is a trend following system, and in a sideways moving market, the whipsaws can be costly. To help weed out the signals in a sideways moving market, some use the Parabolic SAR signals in combination with J. Welles Wilder's Average Directional Index (ADX).This ensures that only Parabolic SAR signals in the direction of the trend are taken to open positions. The ADX helps to determine whether a market is in a trending state. One strategy explains that the best time to use a trending system such as Parabolic SAR is when the ADX is rising.
The Parabolic SAR gets its name because the stops resemble a parabola or a "French Curve." It is a function of price and time. The Parabolic SAR is designed to allow room for the market to react after a trade is initiated and then the stop is rapidly increased. The stop only incrementally moves in the direction that the trade has been initiated. The speed of the Parabolic SAR depends on the settings used.
If you would like to learn more about this tool, review Wilder's book, New Concepts in Technical Trading Systems.
Menu:
Settings
The Defaults are set at .02 for the Start, Max, and Increment. These values can be changed by clicking in their respective boxes and changing the values.
Marker
The Color selection allows the user to change the color of the marks & the Thickness selector allows the user to change the thickness or size of the mark displayed.
To save your modified settings to be applied to future charts, click Save As Default. Once this is clicked at all times in the future the settings you have set will be applied to future charts when this study is added.
To return to the Factory Settings, click Factory Settings and then click Save As Default. Once this done at all times in the future the Factory Settings will be applied to future charts when this study is added.
Click Ok to apply the Parabolic SAR to the selected chart or click Cancel or Remove to exit the study without applying it.
Click Remove to remove the study from the selected chart.