Parabolic SAR

🔍 What is Parabolic SAR?

The Parabolic SAR (Stop and Reverse) is a popular trend-following indicator developed by J. Welles Wilder Jr., who also created other well-known tools like the RSI and Average True Range. The name “Parabolic SAR” comes from the parabolic shape the indicator draws on the chart and its core function: indicating potential Stop and Reverse points in a trend.

This tool is primarily used to identify the direction of a trend and signal potential reversal points. It appears as a series of dots placed above or below the price bars on a chart. When the dots flip from one side of the price to the other, it suggests a change in trend direction.

⚙️ How It Works

The Parabolic SAR plots points based on price and time. These points move closer to the price as the trend progresses and accelerate over time, hence the term "parabolic." When the price closes beyond the SAR point, the indicator flips to the opposite side.

The calculation incorporates:

• AF (Acceleration Factor): Determines how quickly the SAR moves toward the price. It typically starts at 0.02 and can increase up to 0.20.

• EP (Extreme Point): The highest or lowest point reached during the current trend.

SAR is updated as:

SAR(n+1) = SAR(n) + AF × (EP − SAR(n))

If in an uptrend: SAR moves upward, trailing below price. If in a downtrend: SAR moves downward, hovering above price.

The faster the price moves in one direction, the quicker SAR closes in — and eventually triggers a reversal when price crosses the SAR level.

📖 How to Read It

• Dots below the price: Uptrend in motion.

• Dots above the price: Downtrend in motion.

• Dot switch from below to above (or vice versa): Potential trend reversal signal.

In simple terms:

• Buy signal: When the dots flip below the price.

• Sell signal: When the dots flip above the price.

⚙️ Best Settings

The default setting for the Parabolic SAR is:

• Step (AF): 0.02

• Maximum Step: 0.20

You can adjust the AF to make the indicator more or less sensitive:

• Lower AF (e.g., 0.01): More conservative, filters out false signals.

• Higher AF (e.g., 0.05 or above): More responsive, may lead to more signals (including false ones).

Traders should test different settings depending on their strategy and time frame.

🧠 How to Use It in a Strategy

Parabolic SAR works best in strong trending markets, but it tends to underperform in sideways or choppy conditions.

Basic Trend Strategy:

• Enter Long: When dots flip below the price.

• Exit Long / Enter Short: When dots flip above the price.

• Place stop-loss: Just below (for longs) or above (for shorts) the most recent SAR level.

Combined with Other Indicators:

• With Moving Averages: Confirm trend direction. Only take SAR buy signals if price is above a key MA (e.g., 50 EMA).

• With RSI: Use RSI to confirm overbought/oversold conditions before acting on SAR signals.

• With ADX: Use the ADX to measure trend strength. Avoid SAR signals when ADX is low (non-trending market).

⚠️ Common Mistakes

1. Using SAR in a sideways market: This leads to frequent and false signals.

2. Over-relying on SAR: It’s a lagging indicator; best used with confirmation.

3. Ignoring trend context: Using SAR reversals against strong trends can be dangerous.

4. Poor parameter adjustment: Not tuning the AF to match the asset’s volatility can lead to overtrading or missed signals.

🧠 Final Thoughts

The Parabolic SAR is a powerful visual trend tool for spotting reversals and managing trades. It provides clear entry and exit points but should not be used in isolation. Its greatest strength is also its weakness: it performs well during strong trends but poorly in sideways conditions.

Best Use Case:

• Combine Parabolic SAR with other trend or momentum indicators.

• Use it for trailing stop-loss placements and dynamic exit strategies.

Whether you are swing trading or looking for simple trend-based entries, the Parabolic SAR can add clarity and structure to your system — as long as you apply it within the right market context.