Parabolic SAR
Definition:
Parabolic SAR was developed by J. Welles Wilder. It is designed to create exit points for both long and short positions in such a way that it allows for reactions or fluctuations at the beginning of the position, but accelerates upward (for long positions) or downward (for short positions) as the movement tops out.
Parabolic SAR is plotted around the price chart like a moving average or Bollinger Bands. The formula is complex, but is described in great detail in Wilder's book, New Concepts in Technical Trading Systems.
Interpretation:
If the price is above the reading for the SAR, one may consider entering a long position (or bullish). The SAR for each day is the exit point under this interpretation. Therefore, if the price falls below the SAR one may consider closing this long position.
If the price is below the reading for the SAR, one may consider entering a short position (pr bearish). The SAR for each day would be the exit point under this interpretation (or a possible entry point for a long position.) Therefore, if the price rises above the SAR one may consider closing this short position.
Wilder suggests using this indicator in a trending (or directional) market. If the security is trending up, then one mighty only take long positions. If the security is trending down, one might only take short positions.
