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Parabolic Trading System
This particular technique has been around a long time and is still widely used by many analysts because of its adaptability to most markets.
The parabolic time/price system was first introduced by J. Welles Wilder Jr. in his book 'New Concepts In Technical Trading Systems'. It is very often referred to as the SAR system meaning stop and reverse. This means when a stop is hit the system reverses so it is permanently in the market.
It is beyond this lesson to give the exact calculation of the acceleration factor and it is not really necessary to know the formula as most charting services now incorporate the system in their indicator range.
Example of what SAR looks like.
My Use Of SAR
So far so good. The system is simple to trade and is very visual so it's easy to know when you should be short or long. If the SAR point (dots) are above the market you should be short and if they are below the market you should be long.
Here's the problem! It doesn't perform very well in the markets I have tested it on nor do I know any traders who trade it as a stand-alone system. Maybe in the markets of the past it would have worked well but not so now. The problem is there is just too much whipsaw.
Now you may be asking if there is too much whipsaw why mention the system at all? Good question and here are two reasons I find a good use for the system.
I am sure you can find many other uses for the SAR system and its well worth playing around with the parameters to see if it can be added to your trading arsenal.