Parabolic SARNotes:

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Overview

The Parabolic SAR (Stop and Reverse) is a technical analysis indicator that is used to identify the direction of a trend in financial markets. The indicator is based on the assumption that trends accelerate as they progress, and that a change in trend direction can be predicted by a change in the rate of acceleration. The Parabolic SAR is plotted as a series of dots above or below the price of an asset, depending on the direction of the trend. If the dots are above the price, it indicates a downtrend, and if the dots are below the price, it indicates an uptrend. The position of the dots also changes over time, moving closer to the price in an accelerating trend and further away in a decelerating trend.

How to Trade

1. Identify the direction of the trend: Before using the Parabolic SAR, you need to determine the direction of the trend. The SAR is most effective in trending markets, so it is important to identify whether the trend is up or down.
2. Plot the SAR on the chart: Once you have identified the trend, plot the Parabolic SAR on the chart. The SAR is plotted as a series of dots above or below the price, depending on the direction of the trend.
3. Determine the entry point: The SAR can be used to determine potential entry points. When the SAR is below the price and moving higher, it indicates a bullish trend, and traders should look for buying opportunities. Conversely, when the SAR is above the price and moving lower, it indicates a bearish trend, and traders should look for selling opportunities.
4. Set stop-loss orders: The Parabolic SAR can also be used to set stop-loss orders. When the SAR changes direction, it can be used to set a stop-loss order. For example, if you are long and the SAR moves below the price, it is a signal to exit the trade.
5. Use the SAR to trail stop-loss orders: The SAR can also be used to trail stop-loss orders. Traders can move their stop-loss orders in the direction of the trend, using the SAR as a guide. For example, if you are long, you can move your stop-loss order up as the SAR moves higher.
6. Combine the SAR with other indicators: To increase the accuracy of the Parabolic SAR, traders can combine it with other technical indicators such as moving averages, trend lines, and oscillators.

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How to calculate

The Parabolic SAR is calculated using a complex formula that takes into account price and time. The formula for the Parabolic SAR is as follows:

SAR (i) = SAR (i - 1) + AF (i - 1) * [EP (i - 1) - SAR (i - 1)]

Where:

• SAR (i) = the current period's SAR value
• SAR (i - 1) = the previous period's SAR value
• AF (i - 1) = the acceleration factor from the previous period
• EP (i - 1) = the extreme price from the previous period

The acceleration factor (AF) starts at 0.02 and increases by 0.02 each time the price makes a new high. The AF has a maximum value of 0.20. The extreme price (EP) is the highest price in an uptrend or the lowest price in a downtrend.