Also known as parabolic stop and reverse, Parabolic SAR is a technical indicator developed by J. Welles Wilder Jr. It is used in trending markets to determine entry and exit points and is also employed to set effective trailing stop-loss parameters. Parabolic SAR is presented as a series of dots which are plotted either over or under the current market price. The simplest way to read this indicator is to sell when price action is below Parabolic SAR and to buy when price action is above it.
It works by calculating the next period’s value using the current period, added to an acceleration factor (normally valued at 0.02 and increased by a further 0.02 each time a new extreme high or low point is registered), this is multiplied by the value of that last registered Extreme Point (EP) minus the current value. The way the acceleration factor is set causes SAR to converge on the current price as a trend continues. This indicator takes as a given that trends tend to be short-lived and can only continue unabated for a limited period of time.