In stock and securities market technical analysis, parabolic SAR (parabolic stop and reverse) is a method devised by J. Welles Wilder Jr., to find potential reversals in the market price direction of traded goods such as securities or currency exchanges such as forex.
[1] It is a trend-following (lagging) indicator and may be used to set a trailing stop loss or determine entry or exit points based on prices tending to stay within a parabolic curve during a strong trend.
The indicator generally works only in trending markets, and creates "whipsaws" during ranging or, sideways phases.
To prevent it from getting too large, a maximum value for the acceleration factor is normally set to 0.20.
Generally, it is preferable in stocks trading to set the acceleration factor to 0.01, so that it is not too sensitive to local decreases.
A modern study of parabolic SAR based on 2,880 years of backtesting over a 12-year period to 2023 on the Dow Jones Industrial Average 30 stocks, demonstrated using PSAR with a standard OHLC chart resulted in a 19% win rate.
Using PSAR with a Heikin Ashi chart produced a 63% success rate.