4. Parabolic SAR (Stop and Reverse)

---

1. What is Parabolic SAR?

Parabolic SAR (Stop and Reverse) is a trend-following indicator developed by J. Welles Wilder. It helps identify potential trend direction and reversal points by plotting dots (called SAR) above or below price on a chart. It is primarily used to set trailing stop losses or signal exits.

---

2. Components of Parabolic SAR?

• SAR Dots: Plotted above price during downtrends, and below price during uptrends.

• Acceleration Factor (AF): Controls the speed of SAR's movement (default is 0.02, max is 0.20).

• Extreme Point (EP): The highest or lowest price in the current trend.

---

3. Pros and Cons of Parabolic SAR?

Pros:

• Simple and visually intuitive.

• Effective in strong trending markets.

• Automatically provides trailing stop-loss levels.

Cons:

• Whipsaws in sideways or choppy markets.

• Not useful for range-bound strategies.

• Doesn't account for volume or volatility.

---

4. What is the purpose of Parabolic SAR in stock analysis?

• To identify trend direction.

• To signal potential entry/exit points.

• To provide trailing stop loss placement during a trend.

---

5. How is Parabolic SAR calculated or derived?

1. SAR is updated each period based on:

   SARnext=Current SAR+AF×(EP−CurrentSAR)\text{SAR}_{\text{next}} = \text{Current SAR} + AF × (EP − Current SAR)

2. The EP and AF are updated as the trend progresses.

3. Once a reversal occurs (price touches or crosses SAR), the SAR switches sides.

---

6. When should traders use Parabolic SAR?

• In clearly trending markets, both up and down.

• To set or trail stop losses dynamically.

• When executing momentum or breakout strategies.

---

7. What are the limitations or risks of using Parabolic SAR?

• Generates false signals during consolidation.

• Not suitable for detecting range reversals or sideways movement.

• Lags slightly behind the trend.

---

8. What are common mistakes when interpreting Parabolic SAR?

• Using it in non-trending conditions.

• Relying on it without confirmation from other indicators.

• Assuming every reversal dot means a profitable trade signal.

---

9. How can Parabolic SAR be combined with other tools for better accuracy?

• Use with Moving Averages to confirm trend.

• Combine with MACD or ADX to verify momentum strength.

• Add candlestick analysis to avoid premature reversals.

---

10. How do professional traders interpret Parabolic SAR differently from beginners?

Professionals:

• Use SAR primarily for managing stop-losses rather than as a standalone signal.

• Combine it with volume and trend filters to avoid noise.

• Adjust the AF value depending on volatility or timeframe.

Beginners:

• Often trade every signal blindly, especially in sideways markets.

• Misuse it without understanding market context.

• Don’t tune parameters or test across different conditions.

---