Parabolic SAR

Parabolic SAR was developed by J. Welles Wilder Jr. and is described in his book New Concepts in Technical Trading Systems. SAR stands for stop and reverse. Parabolic SAR is an indicator that we can safely say is a very useful and accurate tool during a trending period - when it provides excellent entry and exit points.

A stop loss is calculated for each day using the previous days data. The advantage Parabolic SAR is that the stop level can be calculated in advance of the market opening. A stop level or dot below the current price indicates that the price is generally bullish. The stop level will move up every day. When price falls to the stop level, a SAR signal generated. Whereas a stop level above the current price indicates that the price is generally bearish and the position is short. The stop level moves down every day until the price rises to the stop level, a SAR signal triggered.

Trading signals
Go Long : Price meets the Parabolic SAR stop level (dots), while short
Go Short: Price meets the Parabolic SAR stop level (dots), while long

Above shows Parabolic SAR indicator for MSFT (NASDAQ - Microsoft). This indicator is primarily used to trade trends and should not be used in a ranging market. Using this indicator for a trending stock such as this, the following trades might have made by assuming that trading made at the open price on the following day when Parabolic SAR generated a trading signal. Please note that the profit is calculated solely on the difference of the open position price and close position price excluded the commission and etc.

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