Glossary
Parabolic SAR
Wilder's stop-and-reverse trailing stop. It closes in on price as a trend extends, using an acceleration factor from 0.02 to 0.20.
The Parabolic SAR (stop and reverse), introduced by J. Welles Wilder in 1978, is a trailing stop that speeds up as a trend extends. In an uptrend: next SAR = SAR + AF × (EP − SAR), where EP is the highest high of the trend and AF is the acceleration factor. AF starts at 0.02, rises by 0.02 at each new extreme and is capped at 0.20. When price crosses SAR, the position flips and the calculation starts again.
Example
In a gold uptrend, SAR is 3,980.0, the highest high is 4,030.0 and AF is 0.06. The next SAR is 3,980.0 + 0.06 × (4,030.0 − 3,980.0) = 3,980.0 + 3.0 = 3,983.0. If gold then makes a new high, AF rises to 0.08.
Why it matters
SAR always points to a position, long or short, so in a sideways market it flips often and produces a run of small losses. In our lab, SAR rules on gold did not survive costs.