TheStockTalk.net

Parabolic SAR is a time/price system first introduced by J.Welles Wilder in his acclaimed book “New Concepts in Technical Trading Systems” (1978). SAR stands for ’stop and reverse’ and the term ‘parabolic’ comes from the shape of the curve (resembling a parabola) created on the technical chart.

Here is what a chart looks like with Parabolic SAR in use:

As you might have figured, the Parabolic SAR consists of the dots over and under the graph. The idea here is that when the dots are above the chart, the stock is trending down and if the dots are below the chart, the stock is trending up. Also, as with most technical indicators, the Parabolic SAR is a trailing indicator and indicates a buy or sell after the chart has already changed trends.

Here is a graph that indicates buy and sell points using the Parabolic SAR. The green arrows recommend a buy and the red arrows recommend a sell.

One thing I would like add is that when the price is trending closer to the dots, it would be reasonable to expect a reversal in trends and you could buy or sell a little earlier. From this graph you can see that the price range of a day or two before have gotten close to the dots and you could execute the trade to increase efficiency.

Personally, I think I will use Bollinger Bands instead as they are a little more accurate, but this is still a decent indicator. Feel free to comment or correct me if you find any errors, otherwise cheers and happy trading!