If the parabolic line was red, you would follow the bearish trend and keep your short position open. In this calculation, EP refers to the highest high for an uptrend and lowest low for a downtrend, updated each time a new EP is reached. The AF is a constant of 0.02, increasing by 0.02 each time a new EP is reached, with a maximum of 0.20. The https://www.bigshotrading.info/ assumes that you are trading a trend and, therefore, expects price to change over time. If you are long, the Parabolic SAR will move the stop upward every period, regardless of whether the price has moved.

The Acceleration Factor is multiplied by the difference between the Extreme Point and the prior period’s SAR. Note however that SAR can never be above the prior two periods’ lows. Should SAR be above one of those lows, use the lowest of the two for SAR. Where SARn and SARn+1 represent the current period and the next period’s SAR values, respectively.

Spotting an Exit Using the Parabolic SAR

The higher the acceleration factor, the closer it will move to the price. However, you shouldn’t set it too high, as in this case there will be too many reversal signals. Short-term traders that want to enter and exit positions quickly may opt for a higher AF, which means that even small reversals will close them out of a trade. Longer-term traders that want to hold their positions may decrease the AF. This will result in the price needing to make bigger moves to cause a reversal, and thus reversals and trade signals will occur less often.

Move your Stop Loss order from one dot to the next in order to limit the risks and lock in profit. The Parabolic SAR can be found as an Overlay in SharpCharts. The default parameters are 0.02 for the Starting Step and 0.20 for the Maximum Step. If you want the increment amount to be different than the starting step value, then you can add an optional third parameter to set the increment amount. As shown above, these can be changed to suit the characteristics of an individual security. The example below shows the indicator in pink with prices in black/white and the chart grid removed. This contrast makes it easier to compare the indicator with the price action of the underlying security.

Adjusting the Maximum Step

On a chart, the indicator appears as a series of dots placed either above or below the price bars. Conversely, a dot above the price is used to illustrate that the bears are in control and that the momentum is likely to remain downward. When the dots flip, it indicates that a potential change in price direction is under way. For example, if the dots are above the price, when they flip below the price, it could signal a further rise in price.

• Once price stops rising and reverses below SAR, a downtrend starts, with SAR above the price.
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• They appear above or below the current candle for a specific reason.
• However, PSAR shouldn’t be used when the market sideways is approaching as this indicator thrives in a trending environment.
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• In fact, the SAR in Parabolic SAR stands for “Stop and Reverse”.
• Depending on how much risk you’re willing to accept, you can set your stop-loss at or just beyond the parabolic SAR.