The technical indicator of Parabolic SAR was introduced to analyze an existing trend in the market. The indicator will be constructed based on the charts price movements. As an indicator Parabolic SAR is quite similar to the Moving Average; the only difference is that the Stop and Reverse are moving with the higher acceleration and the position can change based on the price.
As it was mentioned above, the parabolic SAR indicator is a technical indicator that is utilized by various traders to help them predict the momentum of the asset as well as the specific time when the momentum designates a higher-than-normal possibility to change in direction. The Parabolic SAR system was designed by Welles Wilder who is a famous technician. Welles Wilders is also known as the developer of RSI or Relative Strength Index. It is depicted into a chain of dots place below or above the price of the asset.
The most important aspect of the Parabolic SAR would be the position of these ‘dots.’ This is utilized by the traders to produce signals contingent upon the position of the dots. A dot positioned below is called a bullish signal, and the momentum will stay in the increasing direction, and a dot will be placed above when there is a downward trend. Utilizing the Parabolic SAR strategy only by itself will lead to the premature exiting or entering the position. Most of the traders will decide to put a stop-loss order on the SAR since the signal will lead to a reversal which will prompt the trader to act on the opposite course.
The Parabolic SAR formula that you can use will depend upon the position of the dot. When it comes to the long position, SAR will be calculated by adding the Parabolic SAR Value to the product of the acceleration factor to the difference of the maximal and value of SAR.
Simply put SAR (i) = SAR (i-1) +Acceleration*[high (i-1)-SAR (i-1)]
For the short position, the formula can be defined as the value of the SAR added to the product of the acceleration to the difference of minimal price to the value of the SAR.
SAR (i) = SAR (i-1) +Acceleration * [low (i-1)-SAR (i-1)]
The value of the indicator will tend to increase in case of the price by the existing bar is higher compared to the past bullish or opposite trend. Acceleration factor will also increase which will result in the Parabolic SAR coming together with the price. In a simpler term, the pace of the shrink and the growth of price will equate to the indicator approaching the price at a faster rate.