Parabolic Stop and Reverse

The Parabolic Stop and Reverse (SAR) is an indicator used in technical analysis in financial markets.

Developed by Welles Wilder, the Parabolic SAR gauges the market’s momentum and is used to identify trends, producing a series of dots above or below the candlesticks of a particular instrument.

The primary function of the Parabolic SAR is to chart and identify potential reversals in the market price direction of traded goods such as securities or currency exchanges such as forex.

Whilst the mathematics behind the Parabolic SAR might be complex, the basic use of the indicator is exceedingly simple.

Namely, it is a signal to buy when the Parabolic dot appears below price, and sell when the dot appears above price.

The indicator also informs the trader where to place one’s stop loss, based upon how far the dot is below or above price.

How to Trade with the Parabolic SAR

The Parabolic SAR is a lagging indicator, as opposed to a leading indicator, meaning it generally follows price. Consequently, it can only really be used in trending market conditions.

A trader attempting to use the indicator during a sideways market will very likely suffer losses.

Hence, the creator of the indicator, Welles Wilder stressed the importance of using complementary indicators in determining the strength of a trend.

The Parabolic SAR has two main parameters.

A setting of 0.02 for its step.

A setting of 0.2 for its limit.

By adjusting these values, a trader can make the indicator more or less sensitive. A higher setting will result in more sensitivity and a lower setting will result in a higher sensitivity.