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. When such an indicator turn does take place, the maximum or the minimum price for the previous period would serve as the starting point. When the indicator makes a turn, it gives a signal of the trend end (correction stage or flat), or of its turn.
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. That is, it is necessary to track the direction of Parabolic SAR and hold open only the positions that are in the same direction as the Parabolic SAR. The indicator is often used as the trailing stop line.
If the long position is open (i.e., the price is above the SAR line), the Parabolic SAR line will go up, regardless of what direction the prices take. The amount of movement of the Parabolic SAR line depends on the value of the price movement.
For long positions:
SAR (i) = SAR (i - 1) + ACCELERATION * (HIGH (i - 1) - SAR (i - 1))
For short positions:
SAR (i) = SAR (i - 1) + ACCELERATION * (LOW (i - 1) - SAR (i - 1))
SAR (i - 1) – 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 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.