## Tuesday, November 26, 2013

### Parabolic SAR Indicator Forex Indicator

Parabolic SAR Indicator
Parabolic SAR (Stop and Reverse) is an indicator developed by J. Willes Wilder to discover and exploit profitable trends in all kinds of markets. It is a popular tool among technical traders, and a straightforward and as a simple mechanism for analyzing the markets, it offers some unique advantages over other tools.
Below we have a chart of the EURUSD pair depicting the Parabolic SAR in action. We observe that the indicator was able to capture many small reversals with remarkable accuracy. And in those cases where it failed, we see that the thrust of the market action was strong enough to place it into a correct configuration, thereby minimizing the potential losses of a faulty trade.

Calculation of the Parabolic SAR
Parabolic SAR is calculated by a recursive formula which ties the prices of one period to another through simple arithmetics.
SAR of Today = SAR of Yesterday + a (EP- SAR of Yesterday)
Or
SAR of Tomorrow = SAR of Today + a(EP-SAR of Today)
EP is the maximum recorded during the time period in consideration. If during each period of analysis a new record is broken, the EP will be updated accordingly, and the SAR value will change.
"a" represents the acceleration factor. It is set at 0.02 in the beginning, and reset each time a new EP is achieved. This is to ensure that the indicator's value will come closer to the EP value every time a new record is broken, but the maximum value for the EP is usually set at 0.2 in order to prevent it from becoming too large and distorting the analytical picture. Due to the higher volatility of the forex market, traders prefer to give an initial value of 0.01 to the acceleration factor on the basis that frequent fluctuations, leaps and bounces in the price action do not justify attaching a lot of significance to arbitrary price highs.
Once the SAR value is calculated one of two courses will be taken in order to derive the signal from the indicator. If tomorrow's SAR remains within today's or yesterday's price range, the indicator is set at the lowest price during that time period. For example, if the SAR is slightly above yesterday's opening lowest price, or close to, but below, yesterday's high, the indicator will be set at today's lowest price.
If on the other hand, tomorrow's SAR value is within tomorrow's price range, the indicator will switch sides. If it is below the price action, it will move to the upside, and if it was on the upside it will come below, signifying a trend switch.