The Parabolic SAR, developed by Welles Wilder, is used to set trailing price stops. SAR refers to Stop-And-Reversal. It is designed to create exit points for both long and short positions in such a way that it allows for reactions or fluctuations at the beginning of the position, but accelerates upward (for long positions) or downward (for short positions) as the movement tops out. Parabolic SAR is plotted around the price chart similar to a moving average.
The Parabolic SAR provides excellent exit points. You should close long positions when price falls below the SAR and close short positions when price rises above the SAR.
If you are long (i.e., the price is above the SAR), the SAR will move up every day, regardless of the direction the price is moving. The amount the SAR moves up depends on how much prices move.
Wilder suggests using this indicator in a trending (or directional) market. If the security is trending up, then one might only take long positions. If the security is trending down, one might only take short positions.