Description

The Parabolic Stop and Reverse (SAR) calculates trailing stop points to use with long and short positions. The SAR was published by J. Welles Wilder as part of a complete trend following system. The dotted lines above the price designate trailing stops for short positions; those below the price are sell stops for long positions.

Formula

For new long positions:

SAR = P + A ( H - P )

Where:

• SAR = the long Stop and Reverse price at which the position is reversed from Long to Short
• P = the previous period’s SAR
• A = the acceleration factor. A begins at .02 for the period immediately after the initial SAR buy stop order opens the current long trade. The next period and each period thereafter, A is increased by .02 for each period that price rises to the highest high level (H) since the current long trade was opened. For periods when price does not set a new high within the current long trade duration, A is left unchanged from its previous period’s level.
• H = the highest price since the current long trade was opened on a buy stop order.

For new short positions:

SAR = P - A ( L - P )

Where:

• S = the short side buy Stop and Reverse Price (SAR) at which the position is reversed from short to long
• P =  the previous period’s SAR
• A = the acceleration factor. A begins at .02 for the next period immediately after the initial SAR sell stop order opens the current short-side trade. The next period and each period thereafter, A is increased by .02 for each period that price rises to the lowest low level (L) since the current short trade was opened. For periods when price does not set a new high within the current long trade duration, A is left unchanged from its previous period’s level.
• L = the lowest price since the current short trade was opened on a sell stop order.

Example