The inventor of the RSI, Welles Wilder, has developed many technical indicators. He summarized these in his book "New Concepts in Technical Trading Systems". This also includes the Parabolic SAR. In fact, the indicator is already called a trading system. This is also the abbreviation SAR - Stop and Reverse System. The indicator is a trend-following indicator and is intended to define both the entry and the stop of a trade.
As with other trend-following indicators, the weakness of the parabolic indicator is that it generates reliable signals in sideways phases. The name Parabolic comes about because it forms a kind of parabolic curve around the course.
Calculation of the Parabolic SAR
The Parabolic SAR is intended to mark turning points and thus signals both for entry and also deliver exit from a position. To start the parabola, one starts from a fictitious trade. Three values are important for the further calculation: the SIP value, the SAR value and the AF value.
The SIP value represents the highest price of a first candle and the SAR value the lowest Price of the first candle, the AF value is the so-called acceleration factor. The third value is the most important of the three, because at the end it determines how quickly the stop point snuggles to the course and thus signals an early reversal.
SAR = SAR (t-1) + AF x [(SIP (t-1) - SAR (t-1)]
Expressed in words: The difference between the previous high and low price is multiplied by the AF factor and the result is added to the last high price What is special, however, is that the acceleration factor AF is increased by a factor of 0.02 depending on the speed of the trend, ie the formation of new highs and lows, and the Parabolic SAR moves ever closer to the course The maximum or minimum price is reached, the factor remains the same.
The acceleration factor can also be set manually, whereby the standard value is 0.02 and the maximum value of Wilder was 0.2.
The interpretation of the Parabolic SAR
As already mentioned, see if the indicator already represents a trading system. If the stop point is cut from the price, this usually leads to a rotation of the position. We have already found that this is not as easy as the general definition suggests in other indicators. It always requires some self-interpretation.
Turning the position should not be understood to mean that you automatically switch from long to short or vice versa, but proceed step by step. If a parabolic stop point is reached, the current trade is initially closed. A new one, on the other hand, is only opened when either another point arises or when the subsequent candle set-ups are defined for entry. The following chart is intended to show the whole thing as an example and without considering the false signals in sideways phases.
It also becomes clear from the chart that the interpretation is not very simple and, strictly speaking, too general. A constant change in volatile markets does not generate a real edge with the Parabolic SAR, because there are simply too many signals that do not indicate a sustainable trend. This may not only be fatal due to the high transaction costs. A filter is therefore essential. We will then identify this in the next post. These could be the following outbreaks or other indicators.
Furthermore, you have to consider whether the Parabolic SAR should not be used as a system, but only for the identification of stops.
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Conclusion - Parabolic SAR alone is only of limited suitability
The idea of the Parabolic SAR is not a bad one, but the indicator intended as a trading system has strong weaknesses in volatile markets.
And since we are in an age As the markets become increasingly volatile, one has to ask to what extent the use of the indicator is worthwhile or how it can be optimized so that it could be used well.
However, this affects almost everyone technical indicators. On their own, most of them do not really add value to the actual price performance.
However, stocks can be traded with the broker StockPair. Equities have a lower level of short-term volatility, which may make Parabolic SAR useful.