The Parabolic Time/Price System, developed by Welles Wilder, is used to set trailing price stops and is usually referred to as the “SAR” (stop-and-reversal). This indicator is explained thoroughly in Wilder’s book, New Concepts in Technical Trading Systems.
The Parabolic SAR provides excellent exit points. You should close long positions when the price falls below the SAR and close short positions when the price rises above the SAR.
If you are long (i.e., the price is above the SAR), the SAR will move up every day, regardless of the direction the price is moving. The amount the SAR moves up depends on the amount that prices move.
The following chart shows Compaq and its Parabolic SAR.
You should be long when the SAR is below prices and short when it is above prices.
The Parabolic SAR is plotted as shown in Wilder’s book. Each SAR stop level point is displayed on the day in which it is in effect. Note that the SAR value is today’s, not tomorrow’s stop level.
It is beyond the scope of this book to explain the calculation of the Parabolic SAR. Refer to Wilder’s book New Concepts in Technical Trading, for detailed calculation information.