science

Parabolic SAR

Parabolic SAR is a science topic covered in the lgStudy science library. This page brings together a partial reference excerpt, illustrations, worked examples, real-world applications and a short study plan, so you can understand Parabolic SAR rather than just read about it. In short: In stock and securities market technical analysis, parabolic SAR (parabolic stop and reverse) is a method devised by J. Welles Wilder Jr., to find potential reversals in the market price direction of traded goods such as securities or currency exchanges such as forex.

Key takeaways

Parabolic SAR belongs to science; place it in that map before memorising details.
Learn the definition first, then one example that makes the definition concrete.
Connect Parabolic SAR to a quantity you can measure, compute or draw — that is where exam questions come from.
Reproduce the core statement of Parabolic SAR from memory before moving on to harder problems.

Reference excerpt

In stock and securities market technical analysis, parabolic SAR (parabolic stop and reverse) is a method devised by J. Welles Wilder Jr., to find potential reversals in the market price direction of traded goods such as securities or currency exchanges such as forex. It is a trend-following (lagging) indicator and may be used to set a trailing stop loss or determine entry or exit points based on prices tending to stay within a parabolic curve during a strong trend. Similar to option theory's concept of time decay, the concept draws on the idea that "time is the enemy". Thus, unless a security can continue to generate more profits over time, it should be liquidated. The indicator generally works only in trending markets, and creates "whipsaws" during ranging or, sideways phases. Therefore, Wilder recommends first establishing the direction or change in direction of the trend through the use of parabolic SAR, and then using a different indicator such as the Average Directional Index to determine the strength of the trend. A parabola below the price is generally bullish, while a parabola above is generally bearish. A parabola below the price may be used as support, whereas a parabola above the price may represent resistance.

Construction The parabolic SAR is calculated almost independently for each trend in the price. When the price is in an uptrend, the SAR emerges below the price and converges upwards towards it. Similarly, on a downtrend, the SAR emerges above the price and converges downwards. At each step within a trend, the SAR is calculated one period in advance. That is, tomorrow's SAR value is built using data available today. The general formula used for this is:

S A R n + 1 = S A R n + α ( E P − S A R n ) {\displaystyle {SAR}_{n+1}={SAR}_{n}+\alpha (EP-{SAR}_{n})} , where SARn and SARn+1 represent the current period and the next period's SAR values, respectively. EP (the extreme point) is a record kept during each trend that represents the highest value reached by the price during the current uptrend – or lowest value during a downtrend. During each period, if a new maximum (or minimum) is observed, the EP is updated with that value. The α value represents the acceleration factor. Usually, this is set initially to a value of 0.02, but can be chosen by the trader. This factor is increased by 0.02 each time a new EP is recorded, which means that every time a new EP is observed, it will make the acceleration factor go up. The rate will then quicken to a point where the SAR converges towards the price. To prevent it from getting too large, a maximum value for the acceleration factor is normally set to 0.20. The traders can set these numbers depending on their trading style and the instruments being traded. Generally, it is preferable in stocks trading to set the acceleration factor to 0.01, so that it is not too sensitive to local decreases. For commodity or currency trading, the preferred value is 0.02. The SAR is calculated in this manner for each new period. However, two special cases will modify the SAR value:

If the next period's SAR value is inside (or beyond) the current period or the previous period's price range, the SAR must be set to the closest price bound. For example, if in an upward trend, the new SAR value is calculated and if it results to be more than today's or yesterday's lowest price, it must be set equal to that lower boundary. If the next period's SAR value is inside (or beyond) the next period's price range, a new trend direction is then signaled. The SAR must then switch sides. Upon a trend switch, the first SAR value for this new trend is set to the last EP recorded on the prior trend, EP is then reset accordingly to this period's maximum, and the acceleration factor is reset to its initial value of 0.02.

Statistical results A modern study of parabolic SAR based on 2,880 years of backtesting over a 12-year period to 2023 on the Dow Jones Industrial Average 30 stocks, demonstrated using PSAR with a standard OHLC chart resulted in a 19% win rate. Using PSAR with a Heikin Ashi chart produced a 63% success rate.

References

Illustrations

Worked examples

Example 1 — a first encounter with Parabolic SAR

Start with the simplest possible case. Write down what Parabolic SAR claims or describes in one sentence, then invent the smallest concrete situation in which that sentence is true. In science, the smallest case is usually a single object, a single equation or a single measurement. Check that every symbol or term in your sentence has a meaning in that case.

Example 2 — changing one variable

Take the situation from Example 1 and change exactly one quantity: double it, halve it, or set it to zero. Predict what should happen to Parabolic SAR before you calculate. Comparing your prediction with the result is the fastest way to find out whether you understand the idea or only the words.

Example 3 — an exam-style question

Typical questions about Parabolic SAR ask you to (a) state it precisely, (b) apply it to given data, and (c) explain a limitation. Practise writing all three answers in under five minutes; the third part is what separates a full-mark answer from an average one.

Applications of Parabolic SAR

In research: Parabolic SAR appears in science research whenever the underlying quantities have to be modelled precisely. Papers usually cite it as a starting assumption and then explore where it breaks down.
In technology and industry: Engineering practice reuses Parabolic SAR in design rules, simulations and safety margins. Knowing the idea lets you read a specification sheet and understand why the numbers look the way they do.
In the classroom: Parabolic SAR is common in secondary-school and first-year university syllabi. It links to neighbouring topics Chart overlays, Technical indicators, so understanding it makes those chapters shorter.
In everyday life: Look for Parabolic SAR outside the textbook — in sport, cooking, traffic, electronics or the sky above you. An example you found yourself is remembered far longer than one you were given.

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How to study Parabolic SAR in 20 minutes

Read the reference excerpt below once, without taking notes.
Close the page and write down what Parabolic SAR means in your own words.
Compare your version with the excerpt and mark what you missed.
Work through the three examples above with pen and paper.
Explain Parabolic SAR out loud to somebody else — or to Teacher Smith in the lgStudy chat.

Frequently asked questions

What is Parabolic SAR in simple terms?

Why does Parabolic SAR matter?

Because it connects several science ideas at once: it gives you a definition you can apply, a quantity you can calculate, and a way to check whether a result is plausible.

How should I study Parabolic SAR?

Read the excerpt, restate it from memory, then work through the examples and applications listed on this page. The five-step study plan above takes about twenty minutes.

What does this page cover?

It gives you a compact reference excerpt plus original lgStudy explanations, examples, applications and study material on Parabolic SAR.