Parabolic SAR

The Parabolic SAR is a trend following indicator that places a series of dots above or below price. SAR stands for "stop and reverse". J. Welles Wilder introduced it in 1978 as a trailing stop system: dots below price mark a rising stop for long positions; dots above price mark a falling stop for shorts. When price crosses the dots, the indicator flips to the other side, signalling a possible trend reversal.

How it looks#

• Dots below price: uptrend. The dots rise each period, accelerating as the trend continues.
• Dots above price: downtrend. The dots fall each period.
• Flip: when price touches the dots, they jump to the opposite side.

The dots curve towards price over time, resembling a parabola, which is where the name comes from.

How it is calculated#

For an uptrend, each new SAR value is:

SAR(next) = SAR(current) + AF × (EP − SAR(current))

• EP (extreme point): the highest high reached during the current uptrend (lowest low in a downtrend).
• AF (acceleration factor): starts at 0.02 and increases by 0.02 each time a new extreme point is made, up to a maximum of 0.20.

As the trend makes new highs, AF grows, so the SAR moves closer to price faster. This is the "parabolic" acceleration: the longer a trend runs, the tighter the stop.

Using Parabolic SAR#

As a trailing stop#

The most practical use. In a long trade, move your stop to the SAR value each period. It never moves down during an uptrend, locking in more profit as the trend accelerates. See Trailing Stop Orders.

As a trend direction filter#

Only take long trades when dots are below price, and short trades when dots are above.

As a reversal signal#

A flip of the dots signals a possible reversal. In Wilder's original system, traders were always in the market: exiting a long and entering a short at each flip. Most modern traders avoid this, because it performs badly in sideways markets.

The big limitation: ranges#

Parabolic SAR assumes the market is always trending. In sideways markets, price crosses the dots repeatedly, producing a long string of losing flips. That is why many traders only use SAR when another indicator confirms a trend, such as ADX above 25. See ADX (Average Directional Index).

Adjusting the settings#

• Lower step and maximum (for example 0.01 and 0.10): slower, fewer flips, wider stops.
• Higher step and maximum (for example 0.03 and 0.30): faster, tighter stops, more flips.

The default 0.02 step and 0.20 maximum are a reasonable starting point for most daily charts.

Parabolic SAR vs Supertrend#

Both are trailing trend indicators that flip sides. Supertrend uses ATR to set its distance from price, adapting to volatility, while Parabolic SAR uses acceleration that tightens over time regardless of volatility. See Supertrend.

Common mistakes#

• Always in the market: reversing at every flip in sideways conditions.
• Ignoring trend strength before using SAR signals.
• Expecting SAR to catch tops and bottoms: it lags and flips after the turn.

Frequently asked questions#

What does Parabolic SAR mean?#

SAR stands for stop and reverse. The indicator provides trailing stop levels and flips to the other side of price when the trend reverses.

Is Parabolic SAR good for ranging markets?#

No. It produces many false signals in sideways markets and works best in clear trends.

What are the default Parabolic SAR settings?#

An acceleration factor that starts at 0.02, rises by 0.02 with each new extreme and is capped at 0.20.

Sources#

• Wikipedia, Parabolic SAR