Understanding Parabolic SAR Calculation

The Parabolic SAR (Stop and Reverse) is a trend-following indicator that helps identify potential reversals in price movement. This indicator appears as a series of dots placed either above or below the price chart, signaling the direction of the trend.

The core concept of the Parabolic SAR lies in its dynamic calculation which adapts to market volatility. It begins by placing the initial SAR value at a significant price point—either a recent high or low—depending on whether the trend is considered bullish or bearish.

With each new price bar, the SAR value is recalculated using a formula that incorporates the previous SAR, the Acceleration Factor (AF), and the Extreme Point (EP). The Extreme Point is the highest high in an uptrend or the lowest low in a downtrend.

The Acceleration Factor starts at a low value (typically 0.02) and increases incrementally (usually by 0.02) every time a new Extreme Point is made. However, the AF is capped at a maximum value, most commonly 0.20, to prevent excessive sensitivity.

As the trend progresses, the SAR value moves closer to the current price. When the price closes beyond the SAR level, a reversal is signaled. At this point, the SAR position flips to the opposite side of the price, the AF resets, and a new Extreme Point is established.

This conceptual model illustrates how the Parabolic SAR adapts to changing market conditions. It effectively captures momentum shifts while maintaining responsiveness to volatility through its adaptive calculation method. The indicator's mechanical nature makes it purely rule-based, relying on price action and time rather than subjective analysis.