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Parabolic SAR

Parabolic SAR is a technical indicator developed to analyze trending markets. On the price chart the indicator should be placed above the price in case of bear’s prevalence and below price when bulls are in control.

When price meets the Parabolic SAR level, the indicator reverses its direction and that means it will be placed on the opposite area. The highest and the lowest prices of the previous period will serve as points to start. A reversal of the indicator shows the beginning of a sideways movement.

The Parabolic SAR indicator gives an opportunity to determine the best exit points.  The price falling below the indicator signals to close long positions while the price rising above the indicator cautions that short positions should be closed. The indicator is often used as a trailing stop.

If a long position is open, the indicator will move upwards with no reference to the price’s direction. The indicator level moves depending on the price movements.

Calculation

SAR(i) = SAR(i-1)+ACCELERATION*(EPRICE(i-1)-SAR(i-1))
where
SAR(i-1) - is the value of the indicator on the previous bar;
ACCELERATION - is the acceleration factor;
EPRICE(i-1) - is the highest (lowest) price for the previous period (EPRICE=HIGH for long positions and EPRICE=LOW for short positions). The indicator value increases if the price of the current bar is higher than previous bullish and vice versa. The acceleration factor (ACCELERATION) will double at the same time, which would cause Parabolic SAR and the price to come together. In other words, the faster the price grows or sinks, the faster the indicator approaches the price.

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