Parabolic SAR is another indicator that is quite powerful when the market is in a strong trend, but less suitable for a sideways market. So that this indicator is also said to be part of the trend following indicators. This technique proposed by J. Welles Wilder in 1978 in his work entitled 'New Concept in Technical Trading Systems.'
The word 'SAR' on indicator variables that compared the price and time is derived from the word 'Stop and Reverse'. While the word 'parabolic' is used to describe the Parabolic SAR line shaped like a parabolic curve.
Parabolic SAR line composed of dots that overshadow price movement in a chart. Dots indicate when the time for action 'sell then buy' or vice versa, so-called 'stop and reverse'. When a line across the stock price indicator from the bottom up then indicates signal to sell. Conversely, if cut from top to bottom, then indicates signal to buy (see picture).
There are two variables in the Parabolic SAR is, 'The Step' and 'Maximum Step'. Wilder recommends setting the Step itself 0:02 and Maximum Step 0.2. The higher the value of the step will make it more sensitive indicator of changes in stock prices and make more bad signals. While the Maximum Step are used to control the distance of Parabolic SAR dots with price movements. Maximum Step to the lower will make the dots farther and farther away from the movement of stock prices (so that the stop loss is also more distant).
Although this method is based on the assumption that a trader always has a position in the shares by following the signals generated by the Parabolic SAR, but its inventors J. Welles Wilder also suggested that traders confirm the trend in the conventional way first. That is when the major trend is showing an uptrend, we better eliminate sell signal is generated and wait for buy signals from Parabolic SAR. Instead buy signal is suggested to be ignored when going on a downtrend.
To assist in this J. Welles Wilder also create an indicator that serves to determine whether a market is trending or not. These indicators are very popular among technical analysis and known as ADX and DMI. In addition, Wilder also create RSI methods that perform very well when the market is sideways or often called a 'choppy market'.
Parabolic SAR formula:
SARn + 1 - SARn + (Af x (EP - SARn))
SARn + 1 = the SAR value tomorrow.
SARn = the SAR value today.
Note:
Calculation of SAR using the advanced time. This means that tomorrow's SAR value is formed based on today's SAR value and price movements the following day.
EP (Extreme Point) = the highest price (if the uptrend)
EP (Extreme Point) = lowest price (if the downtrend)
Af (Acceleration Factor) = in the first 0:02, and continues to increase by 0.02 each new EP is reached; restricted after Af reached 0.2 (maximum).
If the SAR value inside the next day or the next day exceed the price range, meaning that the trend has changed direction.
When the trend changes, then the first SAR value for the new trend of using the EP last on the previous trend, while the EP itself in reset following the recording of data on new trends; Af value is also reset back to 0.02.
The word 'SAR' on indicator variables that compared the price and time is derived from the word 'Stop and Reverse'. While the word 'parabolic' is used to describe the Parabolic SAR line shaped like a parabolic curve.
Parabolic SAR line composed of dots that overshadow price movement in a chart. Dots indicate when the time for action 'sell then buy' or vice versa, so-called 'stop and reverse'. When a line across the stock price indicator from the bottom up then indicates signal to sell. Conversely, if cut from top to bottom, then indicates signal to buy (see picture).
There are two variables in the Parabolic SAR is, 'The Step' and 'Maximum Step'. Wilder recommends setting the Step itself 0:02 and Maximum Step 0.2. The higher the value of the step will make it more sensitive indicator of changes in stock prices and make more bad signals. While the Maximum Step are used to control the distance of Parabolic SAR dots with price movements. Maximum Step to the lower will make the dots farther and farther away from the movement of stock prices (so that the stop loss is also more distant).
Although this method is based on the assumption that a trader always has a position in the shares by following the signals generated by the Parabolic SAR, but its inventors J. Welles Wilder also suggested that traders confirm the trend in the conventional way first. That is when the major trend is showing an uptrend, we better eliminate sell signal is generated and wait for buy signals from Parabolic SAR. Instead buy signal is suggested to be ignored when going on a downtrend.
To assist in this J. Welles Wilder also create an indicator that serves to determine whether a market is trending or not. These indicators are very popular among technical analysis and known as ADX and DMI. In addition, Wilder also create RSI methods that perform very well when the market is sideways or often called a 'choppy market'.
Parabolic SAR formula:
SARn + 1 - SARn + (Af x (EP - SARn))
SARn + 1 = the SAR value tomorrow.
SARn = the SAR value today.
Note:
Calculation of SAR using the advanced time. This means that tomorrow's SAR value is formed based on today's SAR value and price movements the following day.
EP (Extreme Point) = the highest price (if the uptrend)
EP (Extreme Point) = lowest price (if the downtrend)
Af (Acceleration Factor) = in the first 0:02, and continues to increase by 0.02 each new EP is reached; restricted after Af reached 0.2 (maximum).
If the SAR value inside the next day or the next day exceed the price range, meaning that the trend has changed direction.
When the trend changes, then the first SAR value for the new trend of using the EP last on the previous trend, while the EP itself in reset following the recording of data on new trends; Af value is also reset back to 0.02.
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