The Parabolic SAR (Stop And Reverse) was developed by J. Welles Wilder Jr. and is described in his book New Concepts in Technical Trading Systems.
This is a time/price indicator, first introduced by Wilder and the term 'parabolic' comes from the shape of the curve (resembling a parabola) created on the chart.
Sometimes called a reversal system, the Parabolic SAR allows the trader to follow the dots (stop and reverse level) in an upward or downward trend until a SAR point is reached and the trend reverses.
It is primarily used in trending markets and is based on always having a position in the market. This is where the term CSAR' comes from? Stop and reverse.
The indicator may also be used to determine stop points and to estimate when to reverse a position and take a trade in the opposite direction.
Parabolic SAR is more popular for setting stops than for establishing direction or trend. Wilder recommended establishing the trend first and t hen trading with Parabolic SAR in the direction of the trend.
The interpretations in brief are -
If the trend is up, buy when the SAR moves below the price. This will be the stop level below the current price, which will move up every day (if trading daily bars) until activated (when price falls to the stop level).
If the trend is down, sell when the SAR moves above the price. This will be the stop level above the current price, which will move down every day until activated (when price rises to the stop level).
Example of what SAR looks like.
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