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Definition: Parabolic Indicator
The Parabolic indicator refers to the parabolic shape of the “Stop And Reversal“ (SAR)technique curve to analyse suitable entry and exit points. If the stock is trading below the SAR value then one should go short (sell the stock) while if the stock is trading above SAR one should go long( buy more of the stock).
For stocks and securities the SAR method was first devised by J W Wilder. Its trail following indicator can be used to trailing stop loss or find an entry or exit point. The main principle behind the SAR calculation is that unless a security generates profits over time, it should be liquidated. The trends of relative strength are shown as dots placed either above or below the asset price on the chats. A dot which is placed below the asset price is set to be bullish signal and traders can expect the momentum of the stock to keep in upward direction. Conversely a dot which is below the price shows a bearish sentiment and that the momentum might go downwards. The Parabolic SAR follows the trend as it develops with the dots rising slowly initially and then picking up with the trend. This accelerating systems allows the investor to follow the trend. The indicator works fine when the stock is trading but it might give false alarms in cases when there is sidewise movement of price.
However some of the disadvantages of the SAR as an indicator are that during periods of consolidation (when the growth rate is not high) the signal give false indications. Hence in trading it is advised that in addition to SAR other indicators like moving averages, stochastic indicators, and candle stick pattern.