Parabolic SAR: How to spot a buy/sell signal in stock trading?

Investing with moomoo joined discussion · Jul 12, 2021 21:58

Parabolic SAR: How to spot a buy/sell signal in stock trading?

1. Introduction

The SAR (stop and reverse) indicator is similar to a moving average in that it is also an analysis tool that emphasizes both price and time. It is a popular indicator that is mainly used by traders to determine the future short-term momentum of a given asset.

The indicator uses a trailing stop and reverse method abbreviated to "SAR" to determine favorable exit and entry points. Sometimes the indicator is also called Parabolic SAR as the graph is presented in a way that resembles a parabola.

2. Formula

SAR(Tn)=SAR(Tn-1)+AF(Tn)*[EP(Tn-1)-SAR(Tn-1)]

Where SAR (Tn) is the SAR value of the 'n'th period, SAR (Tn-1) is the SAR value of the 'n-1'th cycle, AF is the acceleration factor, and EP is the extreme price.

EP is the extreme point in a trend (highest point reached by a price during an uptrend or the lowest price reached during a downtrend).

AF is the acceleration factor which is initially set to a value of 0.02 (it is increased by 0.02 each time the EP is recorded, with a maximum of 0.20). Traders can choose the acceleration factor depending on their trading style or the specific stock being traded).

3. Indicator Application

● If the stock price is above the SAR parabola, the price trend is bullish (upward).

● If the stock price is below the SAR parabola, the price trend is bearish (downward).

As you can see from the chart below, transaction signals are generated when the position of the dots reverses direction and is placed on the opposite side of the price.

● When the stock price rises above the SAR parabola, a buy signal emerges.

● When the stock price falls below the SAR parabola, a sell signal emerges.