The Parabolic SAR (Stop and Reverse) is a unique trailing stop indicator that accelerates as the trend continues. Developed by J. Welles Wilder, the same creator of RSI, it provides clear stop levels that get progressively tighter over time. This guide will show you how to use Parabolic SAR effectively for your exits.
What is Parabolic SAR?
Parabolic SAR stands for "Stop and Reverse." It appears as a series of dots above or below the price on a chart. When dots are below price, the trend is up and you should be long. When dots are above price, the trend is down and you should be short or out of the trade.
Key feature: Unlike other trailing stops that maintain a fixed distance, Parabolic SAR accelerates toward price as the trend extends. This creates a parabolic curve that eventually catches up to price and triggers an exit.
How Parabolic SAR Works
The SAR calculation involves two key components:
The Acceleration Factor (AF)
The AF starts at 0.02 and increases by 0.02 each time the price makes a new high (in an uptrend) or new low (in a downtrend). It is capped at 0.20 to prevent the stop from accelerating too quickly.
The Extreme Point (EP)
This is the highest high in an uptrend or lowest low in a downtrend. The SAR moves toward the EP based on the acceleration factor.
SAR Calculation (Simplified)
Next SAR = Current SAR + AF x (EP - Current SAR)
- Day 1: SAR at $95, EP at $100, AF at 0.02
- Day 2: SAR = $95 + 0.02 x ($100 - $95) = $95.10
- Price makes new high at $102, AF increases to 0.04
- Day 3: SAR = $95.10 + 0.04 x ($102 - $95.10) = $95.38
Each new high increases the AF, making the stop accelerate faster toward price.
Standard Parabolic SAR Settings
Default Settings
- Initial AF: 0.02
- AF increment: 0.02
- Maximum AF: 0.20
Adjusting the Settings
- Lower AF (0.01): Slower acceleration, stays in trends longer, but exits later
- Higher AF (0.03): Faster acceleration, tighter stops, more frequent exits
- Lower maximum (0.10): Limits how tight the stop can get
- Higher maximum (0.30): Allows very tight stops late in trends
Pro tip: In volatile markets, reduce the AF to give trades more room. In calm trending markets, increase the AF to lock in profits faster.
Using Parabolic SAR as a Trailing Stop
For Long Positions
- Enter your long position when you get your buy signal
- Place your stop at the SAR dot below price
- Each bar, move your stop to the new SAR level
- When price touches the SAR, exit the trade
For Short Positions
- Enter your short position when you get your sell signal
- Place your stop at the SAR dot above price
- Each bar, move your stop to the new SAR level
- When price touches the SAR, exit the trade
Practical Example
You buy a stock at $50 with SAR at $48.
- Day 1: Price $51, SAR rises to $48.06
- Day 3: Price $54, SAR rises to $49.50
- Day 7: Price $58, SAR rises to $53.20
- Day 10: Price drops to $53.20, SAR is hit
- Exit with $3.20 profit per share
Advantages of Parabolic SAR
- Clear stop levels: The dots show exactly where your stop should be
- Automatic acceleration: Locks in more profit as the trend extends
- Trend direction: Dots above or below tell you the current trend
- Easy to use: No complex calculations needed
- Time-based element: Gets tighter over time even without new highs
Disadvantages and Limitations
- Whipsaws in ranging markets: SAR flips frequently in sideways conditions
- Late entries: Using SAR flips for entries often gets you in late
- No consideration of support/resistance: Pure math, ignores chart levels
- Can get too tight: In extended trends, may exit prematurely
Best Practices for Parabolic SAR
Combine with Trend Filters
Only take SAR signals in the direction of the larger trend:
- Use a 50 or 200 SMA to identify the primary trend
- Only use SAR for long exits when above the moving average
- Only use SAR for short exits when below the moving average
Use Multiple Timeframes
- Check the higher timeframe SAR for the major trend
- Trade on your primary timeframe
- Exit when either SAR is triggered
Confirm with Volume
SAR signals are more reliable when confirmed by volume:
- Strong volume on breakouts suggests SAR will hold
- Declining volume warns the trend may be weakening
Parabolic SAR vs. Other Trailing Stops
vs. Chandelier Exit
The Chandelier Exit maintains a consistent ATR distance from highs. SAR accelerates over time. Chandelier tends to stay in trends longer, while SAR locks in profits faster.
vs. Percentage Trailing Stop
A percentage stop trails by a fixed amount. SAR starts wide and gets tight. SAR often captures more profit in extended trends but may exit too early in volatile ones.
vs. Moving Average Stop
Moving averages can lag significantly. SAR is more responsive, especially late in trends when its acceleration is highest.
Analyze Your Exit Strategy Performance
Pro Trader Dashboard tracks all your exits and shows how different strategies would have performed. Compare your current exits to Parabolic SAR and see which works best for your trading style.
Custom SAR Modifications
Fixed SAR
Some traders lock the AF at a fixed value instead of letting it accelerate. This creates a more predictable trailing stop without the parabolic curve.
Adaptive SAR
Advanced traders adjust the AF based on volatility. Higher ATR periods get lower AF to give more room; lower ATR periods get higher AF for tighter stops.
Common Mistakes with Parabolic SAR
- Using in ranging markets: SAR needs trends to work properly
- Using for entries: SAR is better for exits than entries
- Ignoring the wider context: Always check the larger trend first
- Not backtesting settings: Different markets need different AF values
- Fighting the signal: When SAR is hit, exit without hesitation
Summary
Parabolic SAR is an excellent trailing stop indicator that accelerates toward price as trends extend. The standard settings work well for most swing trading, but consider adjusting the acceleration factor based on market volatility. Use SAR with a trend filter to avoid whipsaws in ranging markets. The dots provide clear, objective stop levels that take emotion out of your exits. While not perfect for all conditions, Parabolic SAR is a valuable tool in any trend-following trader's toolkit.
Ready to learn more? Check out our guide on the Chandelier Exit strategy or learn about ATR-based stop placement.