Parabolic

This is a good trend following indicator, an embodiment of the old trading adage "the trend is your friend." Welles Wilder is responsible for creating this time/price reversal indicator. It is made up of a series of evolving points called Stop and Reverse (SAR) points. The position is reversed when the protective stop is triggered. 

As price starts to trend, the SAR points start out moving slowly and accelerate as the trend evolves. The SAR is calculated at the end of the bar according to the following equation.

SAR tomorrow = SAR today + AF (EP trade - SAR today)

  • where AF begins at 0.02 (the default value) and then increases 0.02 for each bar that makes a new extreme in the direction of the trend until a value of 0.2 is reached.
  • where EP = the extreme price point for the trade so far. In the event of an uptrend it is the highest price recorded since the current position was established. Conversely a down trend extreme price is the lowest price recorded since the trade was put on.

This indicator will keep a trader exposed to the trend, while it exists, until the SAR is taken out. It's a very easy indicator to use. The initial trade is taken as price moves through the SAR in either direction. That trade is stopped and the opposite trade invoked when the SAR is penetrated.

The example below demonstrated clearly how the parabolic indicator works. The uptrend is denoted with red dots below the trend, representing the Stop and Reverse levels (SAR). The down trend or correction in this case, shows up with blue dots SAR's above the price action. Some traders report better results using the close as the basis for the trigger. Rather than take the signal as soon as the SAR is penetrated, the signal is triggered once the close penetrates the SAR level.

© Copyright 2003 CQG, Inc. All rights reserved worldwide

Disclaimer
© The MacLean Group Pty Ltd ACN 096 967 038. All rights reserved 2003. This article has been prepared by The MacLean Group and licensed to ASX. The views are those of the author and not of ASX. This material is educational and it is not intended to constitute financial advice.