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 ... Read Answer >>
  2. Why did China designated certain territories as special administrative regions?

    Discover why China designated certain territories as special administrative regions and the freedoms each SAR enjoys as an ... Read Answer >>
  3. How autonomous are special administrative regions?

    Read about the unique independence and governing laws concerning the two Chinese special administrative regions, or SARs: ... Read Answer >>
  4. Why is divergence between indicators important for traders?

    Learn what technical analysts mean by a "divergence" between indicators, and determine why a divergence could be a sign the ... Read Answer >>
  5. What are the most common market indicators forex traders follow?

    Learn the most common technical indicators that forex traders and currency market analysts utilize to predict likely market ... Read Answer >>
  6. How do traders and technical analysts interpret the Average True Ranges (ATR)?

    Learn about average true range, a volatility indicator used by technical analysts to pinpoint changing trends and bullish ... Read Answer >>
Related Articles
  1. Trading

    Introduction To The Parabolic SAR

    Take a closer look at this indicator, which during a trending period, is a very useful and accurate tool.
  2. Trading

    Parabolic SAR Buy Signals in Beaten Down Stocks (ABBV, CVX)

    These four stocks recently flashed a Parabolic SAR buy signal after declining for some time. Should you be looking for more upside?
  3. Trading

    Parabolic SAR Sell Signals

    Strong selling on October 8 sent major indexes below support indicating the downward correction is continuing. Parabolic SAR signals occured in these four stocks recently, signaling to take profits ...
  4. Personal Finance

    Introduction To Phantom Stock And SARs

    Phantom stock and stock appreciation rights reward employees with compensation tied to stock performance.
  5. Trading

    Using Technical Indicators To Develop Trading Strategies

    Unfortunately, there is no perfect investment strategy that will guarantee success, but you can find the indicators and strategies that will work best for your position.
  6. Trading

    Introduction To Momentum Trading

    This trading style offers major profit potential thanks to the powerful way in which momentum can drive a stock.
  7. Trading

    Forex: Money Management Matters

    Currency trading offers far more flexibility than other markets, but long-term success requires discipline in money management.
  8. Trading

    Using Trading Indicators Effectively

    Select multiple indicators, avoid information overload and optimize indicators to effectively use technical analysis tools.
RELATED TERMS
  1. Confirmation

    The use of an additional indicator or indicators to substantiate ...
  2. Suspicious Activity Report - SAR

    One of the tools provided under the Bank Secrecy Act (BSA) as ...
  3. Confirmation On A Chart

    An indicator or chart pattern that provides evidence that the ...
  4. SAR (Saudi Riyal)

    The currency abbreviation the Saudi riyal (SAR), the currency ...
  5. Technical Analyst

    A technical analyst, or technician, is a securities researcher ...
  6. Buy Stops Above

    A recommendation to buy a specific security when a the security's ...
Hot Definitions
  1. Racketeering

    A fraudulent service built to serve a problem that wouldn't otherwise exist without the influence of the enterprise offering ...
  2. Aggregate Demand

    The total amount of goods and services demanded in the economy at a given overall price level and in a given time period.
  3. Fixed Cost

    A cost that does not change with an increase or decrease in the amount of goods or services produced. Fixed costs are expenses ...
  4. Blue Chip

    A blue chip is a nationally recognized, well-established, and financially sound company.
  5. Payback Period

    The length of time required to recover the cost of an investment. The payback period of a given investment or project is ...
  6. Collateral Value

    The estimated fair market value of an asset that is being used as loan collateral. Collateral value is determined by appraisal ...
Trading Center