Described by Welles Wilder in his 1978 book, "New Concepts in Technical Trading Systems," the Parabolic SAR (PSAR) sets trailing price stops for long or short positions. Wilder was looking for a system that could capture most of the gains in a trending market without relying on some external method to retain profits.
To use, let 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 a 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, making a tighter stop-loss as the price moves in a favorable direction.