Parabolic SAR

Description

Parabolic SAR (Stop and Reverse) was also developed by J. Welles Wilder. It places a series of dots either above or below price, acting as a trailing stop that accelerates as the trend matures. The “parabolic” name describes how the dots curve closer to price over time as momentum builds.

How It Works

In an uptrend, SAR dots appear below price and step upward with each new higher high, governed by an acceleration factor (AF). The AF starts at 0.02 and increases by 0.02 each time price makes a new extreme, up to a maximum of 0.20. This acceleration means the SAR dot moves closer to price as a trend extends — tightening the trailing stop automatically. When price closes below the SAR dot, the system reverses: dots flip to above price and begin tracking the new downtrend. The indicator is always in the market — always holding either a long or short position.

How to Read It

Dots below price indicate an uptrend; dots above indicate a downtrend. A flip in dot position signals a potential trend reversal. The gap between price and the dots reflects the trend’s age and strength — a wide gap suggests a young, strong trend; dots close to price suggest an aging trend that may be near exhaustion. Traders frequently use the current SAR value as their trailing stop level.

Common Uses

• Trailing stop placement in trending trades
• Exit timing — exit when the dots flip sides
• Trend filter — only take long signals when SAR is below price
• Position management, adjusting stops as the SAR steps up or down

Caveats

Parabolic SAR is highly sensitive to choppy, sideways conditions. When price is not trending, the indicator stops and reverses repeatedly — generating a rapid series of small losses. It works well in smooth, clean trends and poorly in everything else. The default acceleration factor (0.02/0.20) can be tuned: lower values follow price more loosely; higher values trail more aggressively. Always confirm with another indicator before trading SAR signals in isolation.