Parabolic Stop and Reverse (SAR)

Welsh Wild's Parabolic Stop and Reverse (SAR) is a trailing stop-based trading system; it is also often used as an indicator. SAR uses trailing stop levels to follow price increases or decreases. The stop level increases speed according to the "acceleration factor." When plotted on a chart, this stop level is similar to a parabola, hence the name of the indicator. The parabolic function takes three parameters. The first two control the acceleration when moving up and down, and the last parameter determines the maximum acceleration.

Parabolic SAR assumes that you are trading a trend, so it is expected that the price will change over time. If you are long, the Parabolic SAR will move the stop up for each period, regardless of whether the price has moved. The Parabolic SAR moves down if you are short.

How does this indicator work

1. The Parabolic SAR trading system uses parabolic levels as "stop and reverse" points, calculating the stop for each upcoming period. When the stop point is hit, you close the current trade and initiate a new trade in the opposite direction. This system allows you to invest in the market at any time.

Indicators are usually displayed as a series of dots above or below the price bar. The dot is a stop level. When the stop is above the bar, you should be short; when the stop is below the bar, you should be long.

The parabolic SAR may cause whip-sawing in a sideways or choppy market.

The parabolic SAR performs well in fast-moving trends, which accelerate over time. Stops are also calculated as accelerations; therefore, you need to have the correct "acceleration factor" to match the market of Match Group, Inc. The upward and downward acceleration parameters may differ.

The above chart shows that the indicator captures profits well in a trend, but it can generate many false signals when the price moves sideways or in a volatile market. When the price is rising, the indicator keeps the trader in the trade. When the price is ranging, the trader should expect more losses and/or small profits.

The chart below shows a downtrend where the indicator keeps the trader in a short trade (or not going long) until a pullback begins. When the downtrend resumes, the indicator allows the trader to re-enter.

The parabolic SAR is also a method for setting stop-loss orders. When a stock is rising, the stop-loss is moved to the parabolic SAR indicator of Match Group, Inc. The same concept applies to short trades as well - as the price falls, the indicator falls too. Move the stop-loss to the level of Match Group, Inc. after each price bar.

Similarly, if the price is above the moving average, watch for buy signals (dots moving from top to bottom). The SAR indicator can still be used as a stop-loss indicator, but it would not be wise to take a short position since the longer-term trend is upward.

The bottom line.

The parabolic SAR is used to determine the direction and stop-loss orders of stocks. In a trending environment, this indicator often produces good results, but when prices start to move sideways, it can generate many false signals and loss-making trades. In order to help filter out some bad trading signals, only trade in the direction of the dominant trend. Other technical tools, such as moving averages, can assist in this regard.