Parabolic SAR (Stop and Reverse)

Name Type Prerequisite Use Cases
Parabolic SAR (PSAR) Trend/Regime OHLC Data Trailing stops in strong trending markets.

Definition

The Parabolic SAR is a price-and-time-based trading system designed to find potential reversals in the market price direction. It uses a trailing stop and reverse method called 'SAR', or 'Stop and Reverse'.

Mathematical Equation

\[ SAR_{n+1} = SAR_n + \alpha (EP - SAR_n) \]

Where:

  • \(\alpha\) is the acceleration factor (starts at 0.02, increases by 0.02 to max 0.2)

  • \(EP\) is the Extreme Point (highest high in uptrend, lowest low in downtrend)

Special cases

  • Maximum possible value: Unbounded
  • Minimum possible value: 0
  • Behavior: Follows the price, printing dots above or below price bars to indicate trend and potential reversals.

Visualization

Parabolic_SAR

Trading Significance

  1. Trailing Stop: The primary use is as a trailing stop loss.

  2. Trend Reversal: When price crosses the dots, a reversal is signaled.