The Parabolic SAR, more commonly called PSAR, is a technical indicator whose main objective is to indicate the possible change of trend. SAR is the acronym for Stop And Reversal, because it is very usual to use the points determined by this indicator as possible points of exit, ie, its most common use is to determine points where it is possible that the current trend ends.
This indicator was published by Welles Wilder. It can be use as a trailing stop loss to stay within a parabolic curve during a strong trend. The formula used to calculate the Parabolic SAR is the following:
-SARn+1 = SARn + (EP – SARn)
The SAR is normally represented on a trading chart by a series of dots. It is the only indicator that is generally depict in this manner. Therefore, it provides several advantages to the traders in their market analysis.
The use of Parabolic SAR is really simple. If you see the indicator dots under the bars/candles, or in other words, if the price is higher than the value of the PSAR, the market is in a bullish period. And, conversely, if you see the indicator dots over the bars/candles of the chart, that is an indication that the market is in a downtrend.
The best performance of this indicator as a trend indicator, is in markets with large trend movements, either bearish or bullish. In markets where the trend is lateral or in a range (a market without a clear trend), the Parabolic Sar does not have a very good performance as an indicator of trend so it can give false signals.
- If the price crosses the PSAR this can be an indicative of the end of a trend or a temporary consolidation.
- If the PSAR dots are placed under the bars/candles, the market is decidedly bullish, however, if the dots are placed over the bars/candles that is a sign that the market is in a bearish period.