Welles Wilder in his seminal book, “New Concepts in Technical Trading Systems”,
Wilder introduced the Parabolic SAR system. SAR which means Stop and Reverse
was designed to eliminate some of the frustrations created by lag effect inherent
in trading strategies that employed moving averages.
One of the primary ideas behind the Parabolic SAR is that time is an enemy and once
a position is initiated it must continue to be profitable or it will be closed.
SAR (tomorrow) = SAR (prior) + AF + [High (today) – SAR (prior)
AF= acceleration factor typically set at .02
To calculate SAR, you first need to assume a long or short position and start calculating
from where the market has moved above the most recent low (for long positions) or
below the most recent low (for short positions). For example in a long position,
the lowest low is the starting point for the calculations to begin It is important
to understand that each Parabolic SAR point is essential calculated independently
for each trend in the price. The next SAR value is calculated using data from the
The SAR is basically an exponential smoothing technique using the prior high or
low. The smoothing constant is the AF which starts at .02 once a position
is initiated. After each new high or new low the AF is increased by .02. This will
decrease the lag between price and the SAR.
To prevent trades from being closed early, Wilder incorporated a rule by not allowing
the SAR to enter the price range of the most recent 2 days.
When the price is in an uptrend, the SAR appears below the price and converges upwards
towards it. Similarly, on a downtrend, the SAR appears above the price and converges
SAR sensitivity can be increased by increasing the Acceleration Factor (AF). By
increasing the Acceleration Factor SAR is moved closer to prices, increasing the
odds of a reversal signal. If the Acceleration indicator is too high the Parabolic
SAR will produce too many whipsaws and decrease the odds of catching a trend break