Modifying the Parabolic Stop and Reversal by Dennis Meyers
The parabolic stop and reversal indicator is a popular trading tool, but it's subject to false signals. Here's how it can be modified to improve its performance.
The parabolic stop and reversa (SAR) indicator was introduced by J. Welles Wilder in New Concepts in Technical Trading Systems. The SAR, a trend-following indicator that is always long or short the market, is now standard on almost all modern technical analysis
software. The SAR can be applied to any time horizon bar chart such as monthly, weekly, daily, hourly, or even point & figure. (See sidebar, "The parabolic trading system.")
The basic premise of the parabolic SAR is to create a trailing stop that is at first far enough away from the initial buy so retracements in the early stages of the trend don't stop you out of your position. As the trend matures, the trailing stop moves closer and closer at an accelerating rate to recent local lows of the current price until the stop is penetrated by adverse price movement and a sell signal is given. (The opposite occurs for a sell signal.)