Parabolic SAR (SAR)
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- 1 DEFINITION
- 2 HISTORY
- 3 CALCULATION
- 4 THE BASICS
- 5 WHAT TO LOOK FOR
- 6 SUMMARY
- 7 HOW TO USE IN TRADINGVIEW
Parabolic SAR (SAR) is a time and price technical analysis tool primarily used to identify points of potential stops and reverses. In fact, the SAR in Parabolic SAR stands for "Stop and Reverse". The indicator's calculations create a parabola which is located below price during a Bullish Trend and above Price during a Bearish Trend.
J. Welles Wilder created the Parabolic SAR (SAR) and featured it in his book New Concepts in Technical Trading Systems. The book was published in 1978 and also featured several of his now classic indicators such as; The Relative Strength Index, Average True Range and the Directional Movement Index. Much like the indicators mentioned, the Parabolic SAR indicator is still widely used and has great importance in the world of technical analysis.
Previous SAR = The SAR value for the previous period. Extreme Point (EP) = The highest high of the current uptrend or the lowest low of the current downtrend. Acceleration Factor (AF) = Determines the sensitivity of the SAR. AF starts at .02 and increases by .02 every time the EP rises in a Rising SAR or EP falls in a Falling SAR. The calculations for Rising Parabolic SAR and Falling Parabolic SAR are different so they will be separated. Rising Parabolic SAR Previous SAR + Previous AF(Previous EP - Previous SAR) = Current SAR Falling Parabolic SAR Previous SAR - Previous AF(Previous SAR - Previous EP) = Current SAR
One aspect to consider is the Acceleration Factor (AF) that was mentioned in the calculation. The AF, which moves in user defined increments, is a value which will alter the sensitivity of the SAR. The AF is a multiplier which affects the rate-of-change of the SAR. AF increases as the trend continues in the same direction, until it reaches its maximum (usually .20). The lower the AF, the further away it is from price, therefore it is less likely to signal a stop or reversal. Decreasing the AF increments, decreases the sensitivity of the SAR while increasing it, increases the SAR's sensitivity.
WHAT TO LOOK FOR
Stops and Reversals
The Parabolic SAR (SAR) indicator has a very simple premise. When price in an uptrend breaks below the parabola (which will be below the trend), this signals a potential reversal of price. When price breaks above the parabola (above the trend) during a downtrend, this can also signal a price reversal.
In a practical sense, many traders use these breakthroughs as a point to place stop orders or even as points to enter the market at the beginning of a new trend.
Parabolic SAR is a nice, compact indicator that can provide some good information. It is not typically recommended, however to use it as a stand-alone to generate trading signals. Since it is time and price based it is not adept at measuring the actual strength of a trend, merely its direction and duration. It is a good idea to use it in conjunction with an indicator that specializes in measuring trend strength. A good choice would be Wilder's own Directional Movement.
HOW TO USE IN TRADINGVIEW
- Navigate to https://www.tradingview.com/
- On the landing page, enter a symbol and click "Launch Chart"
- Within the Toolbar along the top of the chart select "Indicators" and choose the one you would like to add to your chart.
- To make changes to your Indicator you will need to access the Formatting Window.
- You can access the Formatting Window by either clicking on the Blue "Format" button in the Chart Header next to the Indicator name, or by right clicking on the Indicator in the chart itself and selecting "Format".
The starting value for the Acceleration Factor (.02 is the Default).
The increment in which the Acceleration Factor will move (.02 is Default).
The maximum value of the Acceleration Factor (.20 is the Default)
Can toggle the visibility of the Parabolic SAR as well as the visibility of a price line showing the actual current value of the Parabolic SAR. Can also select the Parabolic SAR's color, cross thickness and visual style (Cross is the Default).
Last Value on Price Scale
Toggles the visibility of the indicator's values on the right hand axis.
Arguments in Header
Toggles the visibility of the indicator's name and settings in the upper left hand corner of the chart.
Scales the indicator to either the Right or to the Left.