Parabolic SAR
Overview
The Parabolic Stop and Reverse (SAR) is a trend-following indicator that plots dots above or below price to define the current trend direction and provide trailing stop levels. Developed by J. Welles Wilder, the indicator accelerates toward price as the trend matures, eventually crossing price to signal a reversal. The parabolic curve of the dots gives the indicator its name.
Key Concepts
Dots below price = bullish trend; dots above price = bearish trend. Acceleration Factor (AF) starts at 0.02 and increases by 0.02 with each new extreme, capped at 0.20. SAR dots act as trailing stop levels. Flip points (when dots switch sides) signal potential trend reversals. Works best in trending markets; generates excessive signals in ranges.
Entry Signals
Enter long when SAR dots flip from above to below price, signalling a new bullish trend. Confirm the flip with an additional indicator (ADX above 25, moving average alignment) to filter false signals. Enter on the first SAR flip after a consolidation or range breakout. Use the initial SAR dot as a trailing stop from the outset.
Exit Signals
Exit when SAR dots cross to the opposite side of price, signalling trend termination. Trail stops using the SAR dots — they automatically tighten as the trend matures. Exit and reverse when a confirmed SAR flip occurs with volume and momentum confirmation. Take profits before the SAR catches up to price during a decelerating trend.
Best Timeframes
15M, 1H, 4H, Daily
Pro Tips
Parabolic SAR works brilliantly in trending markets but generates heavy losses in ranging conditions — always pair it with a trend filter like ADX (only trade SAR signals when ADX is above 25). The default acceleration settings (0.02/0.20) suit daily charts; consider reducing the step to 0.01 for lower-timeframe trading. SAR is most useful as a trailing-stop mechanism rather than an entry tool.
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