✔️ Information reviewed and updated in December 2023 by Eduardo López
Trading indicators like SAR are one of the most used tools in technical analysis to study charts. These indicators are calculated by means of mathematical formulas, which are transformed into visual information so that operators can interpret it and make better decisions.
There are a wide variety of technical indicators that analyze trends, measure volatility, provide price averages, and more. They can be classified into four categories: trend tracking, oscillators, volatility, and support or resistance.
In this article we will tell you a little more about the Parabolic SAR indicator or Stop and Reverse points, which in the event of a market trend change can stop and change the direction. This indicator informs about the change of the trend and the moment when the price stops and changes its direction.
✨Definition of the SAR indicator✨
This indicator was developed by J. Welles Wilder, who was a highly influential technical analyst and commodity trader.
SAR is an indicator that traces a curved pattern on a price chart, and describes the potential levels of how far the price will go and reverse its direction.. The name of this indicator came about because it reminded the creator of a satellite dish.
The "Stop and Reverse" points are used to detect trends, as they follow the direction of prices.
✨ How is it obtained? ✨
This indicator plots SAR levels on a graph, and its formula is as follows:
SARNEW = SARCURRENT + AF x (EPCURRENT - SARCURRENT)
Where AF means Acceleration Factor, and is a variable value that increases in established increments for each period at which a new high is reached for long or short positions.
For the initial value of AF, the author proposed a value of 0.02. Which increases in steps of 0.02, until reaching a maximum value of 0.20.
On the other hand, EP stands for Extreme Point, and it is the maximum or minimum price that is reached during the recent trend. The maximum for the uptrend, and the minimum for the downtrend.
The curve of this indicator provides a guide to predict the change of a market trend. Wilder claimed that a trend market has a great chance of staying within the constraints of the curve on the chart. For this reason, If the price does not comply with this and breaks the curve, then the trend can be ended. This would indicate that it is time to close and invest.
✨ How is the SAR indicator interpreted? ✨
The direction of the SAR will always be the same during a trend, the trend continues as long as the points remain above or below the prices. When prices are at a “stop and retrace” point, a signal is given to end your recent position and take the opposite position.
This indicator is interpreted as follows:
- The higher the acceleration factor, the further it will move away from the price.
- The lower the acceleration factor, the closer it will be to price.