Also known as parabolic stop and reverse, Parabolic SAR is a technical indicator developed by J. Welles Wilder Jr. It is used in trending markets in order to determine entry and exit points as well as to set effective trailing stop-loss parameters. Parabolic SAR is presented as a series of dots, plotted either over or under the current market price. The simplest way to read this indicator is to sell when the price is below the Parabolic SAR and to buy when the price is above it.
It calculates the value of the following period through using the current period added to an acceleration factor (normally valued at 0.02 and increased by a further 0.02 each time a new extreme high or low point is registered) which is multiplied by the value of the last registered Extreme Point (EP) minus the current value. For this reason, the acceleration factor causes SAR to converge on the current price as a trend continues. This indicator takes as given that trends tend to be short-lived and can only continue unabated for a limited period of time.