Formula : The formula is quite complex and beyond the scope of this definition, but interpretation is relatively straightforward. The dotted lines below the price establish the trailing Stop for a long position and the lines above establish the trailing stop for a short position. At the beginning of the move, the Parabolic SAR will provide a greater cushion between the price and the trailing stop. As the move gets underway, the distance between the price and the indicator will shrink, thus making for a tighter stop-loss as the price moves in a favorable direction.
There are two variables : the step and the maximum step. The higher the step is set, the more sensitive the indicator will be to price changes. If the step is set too high, the indicator will fluctuate above and below the price too often, making interpretation difficult. The maximum step controls the adjustment of the SAR as the price moves. The lower the maximum step is set, the further the trailing stop will be from the price. Wilder recommends setting the step at .02 and the maximum step at .20.
The Nifty Chart shows how the Parabolic SAR can catch most trends and allow the nifty trader to profit from the buy/sell signals. The default settings that Wilder recommends diminishes distracting fluctuations, but does not make the indicator immune to whipsaws . A proper interpretation of this indicator would suggest that a nifty trader should close long positions when the price falls below the SAR Dot of Green candle and close short positions when the price rises above the SAR Dot of Red Candle.
