Introduction
The Parabolic SAR, Developed by Welles Wilder, creator of RSI and DMI,
sets trailing price stops for either long or short positions. Also
referred to as the stop-and-reversal indicator (SAR stands for "stop and
reversal"), Parabolic SAR is more popular for setting stops than for
establishing direction or trend. Wilder recommended establishing the
trend first, and then trading with Parabolic SAR in the direction of the
trend. If the trend is up, but the underlying price drops back below the
trailing PSAR indicator, then sell or liquidate your long position. If
the trend is down, and the underlying price rises above the trailing
PSAR indicator then buy or liquidate your short position.
Example of PSAR in Track 'n Trade Pro:
Calculation
Parameters:
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Initial (20) - the initial
acceleration factor, in 1/1000. |
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Addition (20) - the additional
acceleration factor, in 1/1000.
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Limit (200) - the acceleration
factor limit, in 1/1000.
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Formula:
The computational procedure for the parabolic time/price study is a
logic exercise. The actual computations are quite simple. The logic to
derive those computations is somewhat more complex.
Once the market establishes a direction, the initial SAR becomes the
extreme price for the two intervals. The extreme price is either the
lowest price or highest price for the two trading intervals. The short
position uses the high, and the long position uses the low.
The formula for the PSAR is:
SARt = SARt-1 + ( a * ( EPtrade - SARt-1) )
SARt: The stop and reverse price for the current interval.
SARt-1: The stop and reverse price for the previous interval.
a: The acceleration factor.
EPtrade: The extreme price for the trade. The SAR is always the "stop and reverse" price point. This is the point
you would want to liquidate your current position and establish the
opposite position.
The acceleration factor, a, is a weighting factor. In Wilder's work, the
initial value for the acceleration factor is .02. The acceleration
factor increases by a value of .02 each time the extreme price changes
for the trade. You do not increment the acceleration factor if the
extreme price fails to change. The value for a, the acceleration factor,
never exceeds .20 in Wilder's methodology.
The extreme price for the trade, EP, is just that. What was the highest
or lowest price achieved during this trade? If you have a long position,
use the new highs as the extreme price. When you have a short position,
use the new lows as the extreme price. The extreme price concept allows
for normal market corrections without immediately triggering the SAR
price. It keeps the SAR price moving in the direction of the market.
Customizing
To change the settings of this indicator, open the Program Options
screen by clicking the "Program Options" button located on the main
Toolbar.
See the Program Options section for more details on changing the
settings of each indicator.
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