Parabolic SAR (Stop and Reverse) is a technical analysis tool that may provide traders with potential entry and exit points. The Parabolic SAR indicator consists of dots appearing either above or below the last price on a chart. The positioning of these dots can help traders identify potential trends or trend reversals. Here's how it works:
Bullish Trend: When the Parabolic SAR dots are below the current underlying price, they act as support points. If the price of the underlying remains above the dots, it may indicate a bullish trend. When the dots are farther away from the last price, it may suggest a stronger bullish trend.
Bearish Trend: When the Parabolic SAR dots are above the last underlying price, they act as resistance points. If the price of the underlying remains below these dots, it may indicate a bearish trend. When the dots are relatively distant from the last price, it may suggest a strong bearish trend.
Reversal Signals: The main use of Parabolic SAR is to provide potential reversal signals. When the dots flip from being above to below the last price, or vice versa, Analysts may consider it as trend reversal.
Stop-Loss: Traders can use Parabolic SAR to determine potential adjustment to stop-loss orders. As the underlying price moves in the favored direction, the Parabolic SAR dots move in unison. Traders can decide to use these dots as a reference for adjusting stop loss points.
Parameters:
Acceleration Factor: The acceleration factor determines the rate at which the Parabolic SAR dots adjust to changes in price. A smaller acceleration factor value makes the dots react more quickly to price changes, while a larger step value makes them adjust more slowly.
Acceleration Limit: The Acceleration limit sets a limit on how far away the Parabolic SAR dots can be from the price. Adjusting this parameter affects how closely the dots track price movements and can impact the indicator's responsiveness to trend changes. A typical default value for the acceleration limit is 0.20.
Parabolic SAR Indicator displayed on a chart
*Please note that these observations are for informational purposes and should not be construed as financial advice.