Parabolic SAR (ďSARĒ) stands for Stop and
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:
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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.