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Parabolic SAR

Parabolic SAR (ďSARĒ) stands for Stop and Reversal System.

SAR is a mathematical stock timing model that projects stop order and reversal points for a stock. For easy reading, these points are then overlayed by dots above and below a stockís price trendline. When the stock prices are above the SARís dots, one should long the security. When the stock prices are below the SARís dots, one should short the security. As the stock price tags the SARís points, a sell order should take effect, and one should reverse his position in the stock.

Below is a diagram of the Parabolic Stop and Reversal System using Lucent Technologies as an example:

Reproduced with permission of Yahoo! Inc. 2004 by Yahoo! Inc.
YAHOO! and the YAHOO! logo are trademarks of Yahoo! Inc.

This system allows for investment in the market 100% of the time.

When using the SAR system, one initially starts by investing in the direction of the trend. If buying long, the first stop order should be the lowest price from the prior day. Conversely, if selling short, the initial stop order is the highest price from the prior day.

When buying long, the stop orders increase as the stock price goes up and/or time passes. The opposite holds true when selling short. As time passes, the stop orders accelerate and eventually the price tags the stop order, a sell takes place, and one reverses trading position. The unique feature of this model is that it ties together time and price with each projected stop order point.

The SAR system is particularly good at setting the exit points for a security. It is also recommended that SAR be used in conjunction with other indicators to verify the reversal signal when switching positions from long to short or vice versa. 

The whole premise of the SAR system is to set trailing stop orders and then move them in the direction of the trend. Never go against the trend and never backtrack on a stop order.

The SARís overlay is a very creative way of always being 100% invested in equities, both in bull and bear markets. Additionally, its use of stop orders is ingenious.

 

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