Parabolic SAR Technical Indicator was developed for analyzing the trending markets. The indicator is constructed on the price chart. This indicator is similar to Moving Average with the only difference that Parabolic SAR moves with higher acceleration and may change its position in terms of the price. The indicator is below the prices on the bull market (Up Trend), when the market is bearish (Down Trend), it is above the prices.
If the price crosses the Parabolic SAR lines, the indicator reverses, and its further values are located on the other side of the price. In case of such an indicator reversal, the reference point is the previous period’s high or low. The reversal of the indicator signals either the end of a trend (switch to correction or flat) or its reversal.
The Parabolic SAR is an outstanding indicator for providing exit points. Long positions should be closed when the price sinks below the SAR line, short positions should be closed when the price rises above the SAR line. The indicator is often used as the trailing stop line.
If a long position is open (i.e. the price is above Parabolic SAR), then the indicator line will move up irrespective of the
price movement. The amount of movement of the Parabolic SAR line depends on the value of the price movement.
For long positions:
SAR (i) = ACCELERATION * (HIGH (i – 1) – SAR (i – 1)) + SAR (i – 1)
For short positions:
SAR (i) = ACCELERATION * (LOW (i – 1) – SAR (i – 1)) – SAR (i – 1)
SAR (i – 1) — the value of Parabolic SAR on the previous bar;
ACCELERATION — acceleration factor;
HIGH (i – 1) — the high price for the previous period;
LOW (i – 1) — the low price for the previous period.
The indicator value increases if the price of the current bar is higher than the previous bullish and vice versa. The acceleration factor (ACCELERATION) will double at the same time, which would cause Parabolic SAR and the price to come together. In other words, the faster the price grows or sinks, the faster the indicator approaches the price.