The Parabolic SAR (Stop and Reverse) is a trend-following indicator developed by J. Welles Wilder Jr. It provides potential entry and exit points by plotting dots above or below the price. The indicator is particularly useful for setting trailing stop losses and identifying when a trend may be reversing.
What is Parabolic SAR?
Parabolic SAR appears as a series of dots placed either above or below the price bars. When dots are below the price, the trend is considered bullish. When dots are above the price, the trend is considered bearish. The "parabolic" name comes from the shape the dots form, which resembles a parabola.
Key concept: SAR stands for "Stop and Reverse." When price crosses through the SAR dots, it signals a potential trend reversal, and the dots flip to the opposite side of price. This provides both stop loss levels and reversal signals.
How Parabolic SAR Works
The SAR calculation uses an Acceleration Factor (AF) that increases as the trend continues:
- SAR starts at the most recent Extreme Point (highest high or lowest low)
- SAR moves closer to price as the trend continues
- The Acceleration Factor starts at 0.02 and increases by 0.02 each time a new extreme is made
- Maximum AF is typically 0.20
Reading Parabolic SAR
Bullish Signal (Dots Below Price)
- SAR dots are below the candlesticks
- Indicates an uptrend is in progress
- Dots act as trailing stop loss for long positions
- Dots move up but never down
Bearish Signal (Dots Above Price)
- SAR dots are above the candlesticks
- Indicates a downtrend is in progress
- Dots act as trailing stop loss for short positions
- Dots move down but never up
SAR Flip Example
Stock is trending up with SAR dots below at $48, $48.50, $49...
Stock reverses and closes at $48.50, below the SAR dot at $49.
SAR flips - dots now appear above the price.
This signals the uptrend may be ending and a downtrend beginning.
Trading Strategies with Parabolic SAR
1. Basic SAR Strategy
- Buy when SAR flips from above to below price
- Sell when SAR flips from below to above price
- Always in the market - either long or short
- Simple but can be whipsawed in ranging markets
Ranging Market Warning
Parabolic SAR generates many false signals in sideways or choppy markets. The dots flip frequently, causing whipsaws. Only use SAR in clearly trending markets or combine with trend filters.
2. SAR with Trend Filter
- Use a moving average to identify the primary trend
- In uptrends (price above MA), only take SAR buy signals
- In downtrends (price below MA), only take SAR sell signals
- Ignore SAR signals that go against the primary trend
Filtered SAR Example
Stock is above its 50-day moving average (uptrend).
SAR flips below price (buy signal) - TAKE this trade.
Later, SAR flips above price (sell signal) - use as EXIT only, do not short.
Wait for next SAR buy signal while price remains above MA.
3. SAR as Trailing Stop
One of the best uses of Parabolic SAR:
- Enter trades using other methods (breakouts, patterns, etc.)
- Use SAR dots as your trailing stop loss
- Exit when price crosses through the SAR
- Lets winners run while protecting profits
4. SAR with ADX
- Use ADX to confirm trend strength
- Only use SAR signals when ADX is above 25
- Avoid SAR in low ADX (ranging) conditions
- This combination filters out many false signals
Parabolic SAR Settings
Standard Settings
- Step (AF): 0.02
- Maximum: 0.20
Adjusting Settings
- Lower step (0.01): Slower SAR, farther from price, fewer signals, wider stops
- Higher step (0.03): Faster SAR, closer to price, more signals, tighter stops
- Lower maximum (0.10): SAR accelerates more slowly
- Higher maximum (0.30): SAR gets closer to price faster in strong trends
Setting Adjustments
For longer-term trading: Step 0.01, Max 0.10 (wider stops, fewer whipsaws)
For shorter-term trading: Step 0.02, Max 0.20 (standard)
For aggressive trading: Step 0.03, Max 0.30 (tighter stops, more signals)
Advantages of Parabolic SAR
- Clear visual signals - easy to read
- Built-in trailing stop mechanism
- Objective - no interpretation needed
- Accelerates with trend - tightens stops as trend matures
- Works on any timeframe
Limitations of Parabolic SAR
- Performs poorly in ranging/choppy markets
- Generates frequent whipsaws without trend filter
- Always in the market approach may not suit all traders
- Lagging indicator - signals come after move begins
- Does not account for support/resistance levels
Best Practices for Parabolic SAR
- Always combine with a trend-identification tool (MA, ADX)
- Best used as a trailing stop rather than entry signal
- Avoid using in consolidating markets
- Adjust settings based on your timeframe and risk tolerance
- Consider the overall market context
- Use price action confirmation for entries
Track Your SAR Trades
Pro Trader Dashboard helps you analyze how Parabolic SAR-based exits perform compared to other exit methods.
Summary
Parabolic SAR is a trend-following indicator that provides clear visual signals through dots above or below price. Its primary strength is as a trailing stop mechanism that adapts to trend strength. Dots below price indicate bullish conditions; dots above indicate bearish conditions. The main weakness is poor performance in ranging markets, so always combine SAR with trend filters like moving averages or ADX. When used correctly in trending markets, Parabolic SAR helps traders stay in profitable trends while protecting gains with automatic trailing stops.
Learn more: ADX Indicator and Moving Averages.