PSAR

Psar, short for Parabolic Stop and Reversal, is a technical analysis indicator developed by J. Welles Wilder Jr. and popular in financial charting. It is typically displayed on price charts as a sequence of dots that appear either below the price during uptrends or above the price during downtrends. The position of the dots relative to price is used to identify trend direction and to generate potential reversal signals.

Calculation and parameters are the core of the indicator. The Parabolic SAR uses a prior period’s SAR value, an extreme price (EP) that tracks the highest high in an uptrend or the lowest low in a downtrend, and an acceleration factor (AF). The SAR for the next period is computed roughly as SAR_n = SAR_{n-1} + AF × (EP − SAR_{n-1}). AF starts at 0.02 and can increase by 0.02 whenever a new EP is reached, up to a maximum of 0.20. When the price crosses the current SAR, the trend is considered reversed, at which point a new EP and direction are established and the process restarts with a fresh AF.

Usage and interpretation follow a simple rule: a switch of the dots from below to above price signals a potential bearish reversal, while a switch from above to below signals a potential bullish reversal. The indicator is also used as a trailing stop to manage risk, with stops moving as the SAR advances in the trend. However, PSAR is best suited to trending markets and can produce false signals in sideways or choppy markets. It is typically employed in conjunction with other indicators to confirm signals and improve robustness.