Parabolic S&R, also known as Parabolic SAR, celebrated its 45th anniversary last year. It was developed in 1978 by J. Welles Wilder Jr., who also brought us ATR, RSI, and ADX.
In my opinion, any indicator generally works with a 50/50 probability, and thus, is essentially useless. However, I reiterate that indicators are necessary at the beginning of the learning journey to understand how prices move and to learn how to read price action. In this process, the most important skill is identifying extreme points on the chart. It’s worth noting that there is no absolute extreme; the point will vary depending on the chart’s compression level, the selected timeframe, and the concept behind your trading strategy. In the realm of identifying maximum and minimum points, Parabolic S&R is an undisputed leader.
S&R stands for “Stop and Reverse.” This implies that at the stop point, you not only close the previous position but also open a new one in the opposite direction. I won’t go into the formula here, as you can easily find it online. However, I will note that this formula selects the extreme value, at which the stop-order level is set. As the price moves, the stop level is adjusted according to a specific formula over time.
The indicator assumes that you are constantly in the market, which imposes a rather strict requirement on the market—every price movement, when using the Parabolic SAR, must meet a certain level of volatility on any timeframe. Unfortunately, the market is unaware of this condition, so straightforward application of the indicator is likely to lead to losses. Otherwise, the market would have already ceased to exist.
However, the indicator has one invaluable quality that ensures its leadership among other indicators. It’s not just the idea that you should strive to be in the market as often and as long as possible to catch the right move. That’s just a concept without practical value. Parabolic S&R relieves you of a major headache—it identifies extremes for you. It always finds them using the same algorithm. This means you always know where the previous minimum or maximum was, and therefore, you can determine where you are in the market. Not based on subjective feelings but with an independent, objective measure. You can connect adjacent minimums and maximums and move into chart analysis. From there, you follow the rules for acting on the formed pattern. I emphasize, that no other indicator identifies extremes as clearly as this one.
Add the price behavior rules when crossing the line to the identified extreme points, and you have the core signal for your trading strategy, which will be based on price behavior..
Best regards.
