Saturday, September 13, 2008

Parabolic SAR

The Parabolic SAR indicator was proposed and developed by W. Wilder, who also discovered the more famous RSI and DMI indicators. Parabolic SAR displays the suggested trailing stop losses in visual terms. I'm leaving out information on the formula because its very complex and may distract the user. We'll focus more on the behavior of the indicator and how to make the best use of it.
The indicator also helps you in taking a position by displaying the indicator and the price on the same chart. The buy and sell signals are generated when the upper or lower SAR cross the price line.

The main variables that make up the Parabolic SAR are Step and Maxmum Step. Wilder suggests keeping the values at 0.02 and 0.20. Parabolic SAR performs best in trending markets

The higher the value of the step, higher is the sensitivity of the indicator with respect to price change, but that does not mean that a very high step is desirable. When it is too high, the indicator is too volatile and this limits its usefulness. The Maximum Step is used for adjusting the SAR as price moves. The lower the Maximum Step, the higher the distance to the trailing stop from the price.

No comments: