The parabolic SAR provides excellent exit points. You should close long positions when the price falls below the SAR and close short positions the price rises above the SAR

If you are long (i.e., the price is above the SAR), the SAR will move up everyday, regardless of the direction the price in moving. The amount the SAR moves up depends on the amount that prices move.

The first well-known adaptive technique was the Parabolic Time/Price System, which attempts to reduce the lag intrinsic to a trend system. To do this, Wilder increased the speed of the trend by shortening the number of days in the calculation, whenever prices reached new profit levels. The philosophy of the Parabolic System is that time is enemy. Once a position is entered, it must continue to be profitable or it will be liquidated.

The Parabolic Time/Price System is always in the market; whenever a position is closed out, it is also reversed. The point at which this occurs is call the Stop and Reverse (SAR). When plotted, the Stop and Reverse point seems similar to a trendline, although it has a decreasing lag (the distance between the current price to a trendline, or SAR point, get closer each period). During periods of short, consistent trending, the Parabolic SAR converges on the price trend, extracting excellent profits.

To calculate the SAR value, first assume a long or short position. If the market has recently moved lower and is now above the lows of that move, assume a long. Call the lowest point of the previous trade the SAR initial point (SIP) because it will be the starting point for the SAR calculation (SARI = SIP). Calculate each following SAR as

SAR (today) = SAR (prior) + AF (today) * [High (today) - SAR (prior)]

This is an exponential smoothing formula using the high price for a long position and the low price when a short is held. For this method the smoothing constant the acceleration factor (AF), and it is initially set to .02 at the begging of each trade, after a day in which a new extreme occurs (a new high when long, or a new low when short), the AF is increased by .02. In terms of moving average days, the AF begins at 99 days and increases speed to a maximum of a 9-daymoving average, but not in a linear fashion. The acceleration factor, AF, cannot be increased above the value .20.

In the SAR calculation, the highest high of the current move is used when a long position is held, and the lowest low is used when a short is held. This feature keeps the SAR at its highest possible level during an upward move. An additional rule compensates for this strength and prevents premature reversal by not allowing the SAR to get any closer than the price range of the most recent 2 days:

If long, the SAR may never be greater than the low of today or the prior day. It is greater that this low, set the SAR to that low value. A reversal will occur on a new Intraday low that penetrates the SAR. For short positions, the SAR is initialized as the high of the recent move, AF = .02, and the daily calculation uses the lowest low of the current price move. To allow some price fluctuation, the SAR may never be below the HIGH of today or the prior day.