A:

The parabolic SAR is a popular indicator that is mainly used by traders to determine the future short-term momentum of a given asset. The indicator was developed by the famous technician known as Welles Wilder and can also easily be applied to a trading strategy, enabling a trader to determine where stop orders should be placed. The calculation of this indicator is rather complex and goes beyond the scope of how it is practically used in trading.

One of the most interesting aspects of this indicator is that it assumes that a trader is fully invested in a position at any point in time. For this reason, it is of specific interest to those who develop trading systems and traders who wish to always have money at work in the market.

The parabolic SAR indicator is graphically shown on the chart of an asset as a series of dots placed either above or below the price (depending on the asset's momentum). A small dot is placed below the price when the trend of the asset is upward, while a dot is placed above the price when the trend is downward. As you can see from the chart below, transaction signals are generated when the position of the dots reverses direction and is placed on the opposite side of the price as it was earlier.

SAR.gif

As you can see from the right side of the chart, using this indicator by itself can often lead to entering/exiting a position prematurely. Many traders will choose to place their stop loss orders at the SAR value because a move beyond this will signal a reversal, causing the trader to anticipate a move in the opposite direction.

For more on this indicator see, Introduction To The Parabolic SAR

RELATED FAQS

  1. Why is the Parabolic Indicator important for traders and analysts?

    Discover the rationale behind the parabolic indicator, or parabolic SAR, and why J. Welles Wilder Jr. created it to protect ...
  2. Is it better to use fundamental analysis, technical analysis or quantitative analysis ...

    Understand the difference between fundamental, technical and quantitative analysis, and how each measurement helps investors ...
  3. How do day traders capture profits from the difference between bid and ask prices?

    Discover how day traders capture profits from the difference between bid and ask spreads. These spreads blow out during volatile ...
  4. What types of data are necessary to make a technical analysis?

    Understand what technical analysis is, the basic theory behind employing it and what data inputs are needed to conduct it.
RELATED TERMS
  1. Fintech

    Fintech is a portmanteau of financial technology that describes ...
  2. Indicator

    Indicators are statistics used to measure current conditions ...
  3. Intraday Momentum Index (IMI)

    A technical indicator that combines aspects of candlestick analysis ...
  4. Forex Spread Betting

    A category of spread betting that involves taking a bet on the ...
  5. Mass Index

    A form of technical analysis that looks at the range between ...
  6. Money Flow Index - MFI

    A momentum indicator that uses a stock’s price and volume to ...

You May Also Like

Related Articles
  1. Technical Indicators

    Why is the Parabolic Indicator important ...

  2. Charts & Patterns

    Are These the Top 3 Value Stocks of ...

  3. Chart Advisor

    Defensive? Eye Infrastructure via the ...

  4. Trading Strategies

    Market Timing Tips & Rules You Should ...

  5. Chart Advisor

    Commodity Traders Are Using This ETF ...

Trading Center