Parabolic SAR (Stop and Reversal) is a popular technical analysis tool used by many traders and analysts, mainly known for its ability to identify potential reversal points in the market trend. The term ‘parabolic’ describes the shape of the indicator when it’s charted, which resembles a parabola, and ‘SAR’ stands for ‘Stop and Reversal’, indicating the stop-loss points and potential trend reversal areas.
The Parabolic SAR takes the form of dots placed above or below the price chart of an asset. When the dots are below the price, it indicates an uptrend, signalling buying opportunities. Conversely, when the dots are above the price, it signifies a downtrend, suggesting selling opportunities. The SAR is calculated in a way that it accelerates with the trend, therefore the distance between the SAR and price decreases as the market moves in favor of the trend.
One of the key advantages of the Parabolic SAR is its simplicity in signaling entry and exit points, making it easily understood by beginner traders. However, as with any technical indicator, it is prudent to use it in conjunction with other indicators to ensure increased accuracy of signals.
