Parabolic SAR
The Parabolic Stop and Reverse (SAR) plots dots above or below price to identify trend direction and potential reversal points—perfect for trailing stop losses.
What is Parabolic SAR?
Developed by J. Welles Wilder (creator of RSI and ATR), Parabolic SAR provides potential entry and exit points by plotting dots relative to price. When dots appear below the price, it indicates an uptrend. When dots flip above, it signals a downtrend.
The "Parabolic" name comes from the curved shape the dots form as they accelerate toward price. The dots start slowly after a reversal and speed up as the trend continues, eventually catching up to price and triggering a new signal.
Uptrend Signal
Dots below price indicate bullish momentum. Stay long while dots remain underneath.
Downtrend Signal
Dots above price indicate bearish momentum. Consider shorts or exit longs.
How It Works
Parabolic SAR uses an Acceleration Factor (AF) that increases with each new extreme point (highest high in uptrend, lowest low in downtrend). Default settings are AF starting at 0.02 with a maximum of 0.20.
SAR Calculation
SAR(n+1) = SAR(n) + AF × (EP - SAR(n))
Where:
• EP = Extreme Point (highest high or lowest low)
• AF = Acceleration Factor (starts 0.02, max 0.20)
The AF accelerates the SAR toward price. As the trend extends, the dots get closer to price until they eventually touch, triggering a reversal signal and flipping to the opposite side.
Trading Signals
Parabolic SAR generates clear, objective signals that are easy to follow. The key is waiting for the dots to flip sides before entering a trade.
Buy Signal
- Wait for dots to flip from above price to below
- Enter on the first candle after the flip
- Use the SAR dot as your initial stop loss
- Best in trending markets, not ranges
Sell Signal
- Dots flip from below price to above
- Exit longs immediately on the flip
- Consider short entries in strong downtrends
- Combine with trend filters for better accuracy
Trailing Stop Loss
One of the most popular uses of Parabolic SAR is as a dynamic trailing stop. As the trend progresses, the dots automatically adjust to lock in profits.
Automatic Adjustment
SAR dots move closer to price as the trend extends, tightening your stop.
Profit Protection
Lock in gains by moving your stop to each new SAR level.
Clear Exit Rules
No guessing—exit when price touches the SAR dot.
Limitations
While powerful in trending markets, Parabolic SAR has significant weaknesses in ranging or choppy conditions.
Whipsaws in Ranges
Sideways markets cause frequent false signals as dots flip back and forth.
No Trend Filter
SAR doesn't distinguish between trending and ranging—use ADX or MAs as filters.
Best practice: Only trade Parabolic SAR signals when ADX is above 25 or price is clearly outside a range. This filters out many false signals.
Frequently Asked Questions
What is Parabolic SAR?
Parabolic SAR (Stop and Reverse) is a trend-following indicator that places dots above or below price. Dots below price suggest an uptrend and act as a trailing stop; dots above suggest a downtrend. When price crosses the dots, the indicator flips and signals a potential trend change.
How do I use Parabolic SAR for entries?
A dot moving below price can be used as a buy signal (uptrend); a dot moving above price as a sell/short signal (downtrend). Many traders wait for the first flip after a consolidation or use it with a trend filter (e.g. ADX or moving average) to avoid whipsaws.
Can Parabolic SAR be used as a stop loss?
Yes. The dots act as a trailing stop—move your stop to each new dot as the trend continues. When price touches the dot, the position is closed. This locks in gains but can exit early in choppy markets.
Why does Parabolic SAR whipsaw in ranges?
In sideways markets, price repeatedly crosses the dots, so the indicator flips often and produces false signals. Use it only when a trend is present—e.g. when ADX is above 25 or price is clearly trending—to reduce whipsaws.
What are typical Parabolic SAR settings?
Default is often 0.02 for step and 0.2 for maximum. Higher step (e.g. 0.03) makes the dot follow price more closely and react faster; lower step is slower. Adjust for your timeframe and volatility tolerance.