Parabolic SAR

13 min read

Display Type: Overlay | Complexity: Beginner to Intermediate | Best For: Trend Following, Stop Loss Placement, Entry/Exit Signals, Trend Reversal Detection

Parabolic SAR (Stop and Reverse) is a trend-following overlay indicator that provides dynamic support and resistance levels while simultaneously generating entry and exit signals. Developed by J. Welles Wilder Jr. in 1978, this versatile indicator uses a unique trailing stop system that accelerates with price momentum, making it particularly effective for capturing trending moves while protecting profits. The indicator appears as dots above or below price, creating a visual roadmap for trend direction and providing clear, objective signals for both trend following and reversal strategies.

What is Parabolic SAR? #

Parabolic SAR is a trend-following indicator that plots dots above or below price to indicate the current trend direction and provide dynamic stop-loss levels. When dots appear below price, it signals an uptrend; when dots appear above price, it indicates a downtrend. The indicator’s unique feature is its acceleration factor, which causes the dots to move closer to price as a trend progresses, creating a parabolic curve that gives the indicator its name.

Unlike static support and resistance levels, Parabolic SAR provides dynamic levels that adjust with price movement and time. The indicator operates on the principle that time and price momentum are equally important in trend analysis. As a trend continues, the SAR dots accelerate toward price, eventually causing a reversal signal when price touches or crosses the dots. This creates a stop-and-reverse system where traders are always positioned in the market, either long or short.

Key Uses: #

Trend Following: Clear visual indication of trend direction
Dynamic Stop Loss: Automatic trailing stop-loss placement
Entry/Exit Signals: Objective buy and sell signal generation
Trend Reversal Detection: Early identification of trend changes
Profit Protection: Systematic profit-taking mechanism
Position Management: Clear rules for position direction
Risk Management: Built-in stop-loss system

How Parabolic SAR Works #

Parabolic SAR Formula: #

Rising SAR (Uptrend): SAR(tomorrow) = SAR(today) + AF × [EP – SAR(today)]

Falling SAR (Downtrend): SAR(tomorrow) = SAR(today) + AF × [EP – SAR(today)]

Where:

SAR = Stop and Reverse value
AF = Acceleration Factor (starts at 0.02, increases by 0.02 each period to maximum of 0.20)
EP = Extreme Point (highest high in uptrend, lowest low in downtrend)

Key Parameters: #

Initial AF: 0.02 (standard starting acceleration)
AF Increment: 0.02 (increase per period with new extremes)
Maximum AF: 0.20 (maximum acceleration factor)
Initial SAR: Previous period’s high/low depending on trend direction

Calculation Rules: #

Uptrend Rules:

SAR dots appear below price
AF increases when new highs are made
SAR cannot be higher than previous two periods’ lows
Trend reverses when price touches or goes below SAR dot

Downtrend Rules:

SAR dots appear above price
AF increases when new lows are made
SAR cannot be lower than previous two periods’ highs
Trend reverses when price touches or goes above SAR dot

Signal Generation: #

Buy Signal: Price moves above SAR dots (dots switch from above to below)
Sell Signal: Price moves below SAR dots (dots switch from below to above)
Trend Continuation: Dots remain on same side of price
Acceleration: Dots move closer to price as trend strengthens

Parabolic SAR Characteristics #

Visual Simplicity #

Parabolic SAR offers intuitive visual interpretation:

Clear Direction: Dots above = downtrend, dots below = uptrend
Dynamic Levels: SAR adjusts automatically with price movement
Objective Signals: No subjective interpretation required
Always Positioned: System always indicates market direction

Acceleration Feature #

The acceleration factor creates unique characteristics:

Time-Based Acceleration: SAR accelerates with time in trend
Momentum Capture: Faster acceleration in strong trends
Profit Protection: Trailing stops tighten as trend matures
Reversal Sensitivity: Eventually catches all trend reversals

Trend-Following Nature #

SAR excels in trending markets:

Momentum Capture: Excellent for sustained directional moves
Late Entry Filtering: Reduces whipsaw in early trend phases
Profit Maximization: Stays with trends until clear reversal
Systematic Approach: Removes emotional decision-making

Standard Parabolic SAR Settings #

Default Configuration: #

Start AF: 0.02
AF Increment: 0.02
Maximum AF: 0.20

Settings by Trading Style: #

Trading Style	Start AF	Increment	Max AF	Sensitivity	Best For
Scalping	0.02	0.02	0.20	High	Quick reversals
Day Trading	0.02	0.02	0.20	Standard	Intraday trends
Swing Trading	0.02	0.02	0.20	Standard	Multi-day moves
Position Trading	0.01	0.01	0.10	Low	Long-term trends

Sensitivity Adjustments: #

More Sensitive (Faster Signals):

Higher starting AF (0.03-0.04)
Higher maximum AF (0.25-0.30)
Larger increment steps (0.03)
Better for: Volatile markets, shorter timeframes

Less Sensitive (Smoother Signals):

Lower starting AF (0.01)
Lower maximum AF (0.10-0.15)
Smaller increment steps (0.01)
Better for: Trending markets, longer timeframes

Market-Specific Adjustments: #

Stock Markets:

Standard settings work well for most stocks
Consider lower sensitivity for blue-chip stocks
Higher sensitivity for growth/volatile stocks

Forex Markets:

Standard settings for major pairs
Lower sensitivity for trending pairs (GBP/JPY)
Higher sensitivity for ranging pairs (EUR/USD)

Crypto Markets:

Higher sensitivity due to volatility
Start AF: 0.03, Max AF: 0.25
Monitor for excessive whipsaws

Commodity Markets:

Standard to lower sensitivity
Account for seasonal trends
Consider contract rollover effects

Trading Strategies #

1. Basic Parabolic SAR Trend Following #

Setup: Follow SAR signals for trend direction Long Entry:

SAR dots switch from above price to below price
Enter long position immediately on signal
Use previous SAR dot as initial stop-loss

Short Entry:

SAR dots switch from below price to above price
Enter short position immediately on signal
Use previous SAR dot as initial stop-loss

Exit Rules:

Exit when SAR dots switch to opposite side
Use SAR dots as trailing stops throughout trade
Take partial profits at key resistance/support levels

2. SAR Breakout Strategy #

Setup: Use SAR signals to confirm breakouts Breakout Confirmation:

Price breaks above/below key resistance/support
SAR dots confirm direction (below price for bullish breakout)
Enter in direction of breakout with SAR confirmation

Entry Criteria:

Clear break of significant level
SAR dots on correct side of price
Volume confirmation strengthens signal
No recent SAR reversal (avoid whipsaws)

Risk Management:

Stop below/above breakout level
Use SAR dots as trailing stops
Target next significant price level

3. SAR Pullback Strategy #

Setup: Enter on pullbacks in established SAR trends Trend Identification:

SAR dots consistently on one side of price
Multiple periods without reversal
Strong directional price movement

Entry Method:

Wait for minor pullback toward SAR dots
Enter when price bounces away from SAR support/resistance
Use tight stops beyond SAR level

Confirmation Signals:

Candlestick reversal patterns at SAR level
Volume expansion on bounce
Other indicators confirming direction

4. SAR Divergence Strategy #

Setup: Combine SAR with momentum oscillators Divergence Identification:

Price making new highs/lows
Momentum oscillator showing divergence
SAR still in trend direction but showing signs of deceleration

Entry Timing:

Wait for SAR reversal signal
Confirm with momentum oscillator alignment
Enter in direction of new SAR signal

Risk Control:

Use previous extreme as stop
Take profits quickly on divergence trades
Monitor for trend resumption

Combining Parabolic SAR with Other Indicators #

SAR + Moving Averages #

Trend Filter System:

Use 50/200 MA for major trend direction
Trade SAR signals only in direction of MA trend
Above MA = Only long SAR signals
Below MA = Only short SAR signals

Benefits:

Reduces false signals in ranging markets
Improves overall win rate significantly
Combines trend and momentum analysis
Natural position sizing guide

Implementation:

Check MA direction before taking SAR signals
Ignore counter-trend SAR signals
Use MA as additional stop-loss reference

SAR + RSI #

Momentum Confirmation:

SAR for trend direction and timing
RSI for momentum confirmation
Stronger signals when both indicators align

Signal Enhancement:

SAR buy + RSI oversold = High probability long
SAR sell + RSI overbought = High probability short
Avoid SAR signals when RSI shows divergence

Overbought/Oversold Context:

Take SAR reversal signals more seriously in extreme RSI zones
Use RSI to gauge potential for trend continuation
Exit early if RSI reaches opposite extreme

SAR + Volume #

Volume Confirmation:

SAR signals backed by volume are more reliable
Volume spikes at SAR reversals indicate strong conviction
Low volume SAR signals often fail

Analysis Method:

Compare volume on SAR signal day to average volume
Look for volume expansion in direction of new SAR trend
Use volume-based indicators like OBV for confirmation

SAR + Support/Resistance #

Level-Based Trading:

Identify key price support/resistance levels
Use SAR signals near these levels for high-probability trades
Confluence of SAR and price levels increases success rate

Strategy Implementation:

Mark significant horizontal support/resistance
Watch for SAR reversals near these levels
Enter when both SAR and price level support direction

Market Condition Analysis #

Trending Markets #

SAR Performance:

Excellent performance in sustained trends
Captures majority of trending moves
Minimal whipsaws during strong directional phases
SAR dots provide excellent trailing stops

Trading Approach:

Use standard settings for optimal performance
Focus on trend-following strategies
Avoid counter-trend signals
Let SAR trail stops run full course

Ranging Markets #

SAR Performance:

Poor performance with many false signals
Frequent reversals create whipsaws
Stop-and-reverse nature works against range trading
Acceleration factor resets frequently

Trading Approach:

Avoid or minimize SAR signals in ranges
Use range boundaries as primary signals
Consider more sensitive settings to catch range extremes
Combine with oscillators for better timing

Volatile Markets #

SAR Performance:

Increased false signals due to price spikes
May need setting adjustments for smoother operation
Benefits from volume confirmation
Faster acceleration may be needed

Trading Approach:

Use less sensitive settings to reduce noise
Require additional confirmation signals
Consider wider stops beyond SAR levels
Monitor for spike reversals

Advanced Parabolic SAR Techniques #

Multiple Timeframe SAR #

Strategy: Use SAR across different timeframes

Higher Timeframe: Overall trend direction
Lower Timeframe: Precise entry timing
Alignment Rule: Trade when timeframes agree

Example Setup:

Daily SAR: Bullish (dots below price)
4-Hour SAR: Just turned bullish
1-Hour SAR: Entry confirmation

SAR Trend Strength Analysis #

Concept: Analyze SAR behavior for trend strength Strong Trends:

SAR dots far from price
Consistent acceleration
Few periods between reversals

Weak Trends:

SAR dots close to price
Frequent reversals
Choppy price action

SAR Failure Analysis #

Failed Signals:

SAR reversal immediately followed by another reversal
Often indicates ranging market conditions
Can be used as range trading signals

Trading Failed Reversals:

Opposite direction often provides good entry
Use tight stops on failure trades
Watch for trend resumption

Custom SAR Variations #

Adaptive SAR:

Adjust AF based on volatility measures
Higher AF in volatile conditions
Lower AF in stable conditions

Time-Based SAR:

Incorporate time elements
Faster acceleration during active trading hours
Slower acceleration during quiet periods

Common Parabolic SAR Mistakes #

Mistake 1: Using SAR in Ranging Markets #

Problem: Taking all SAR signals regardless of market condition Solution: Identify market structure and avoid SAR in clear ranges

Mistake 2: Ignoring Broader Trend Context #

Problem: Trading counter-trend SAR signals Solution: Use trend filters like moving averages

Mistake 3: Not Adjusting for Market Volatility #

Problem: Using same settings across all market conditions Solution: Adapt sensitivity based on volatility and timeframe

Mistake 4: Poor Risk Management #

Problem: Not using proper position sizing with SAR signals Solution: Calculate position size based on SAR stop distance

Mistake 5: Overtrading SAR Signals #

Problem: Taking every SAR reversal signal Solution: Filter signals with additional confirmation criteria

SAR Settings by Timeframe #

Timeframe	Start AF	Increment	Max AF	Signals/Day	Trading Style
1-minute	0.03	0.03	0.30	20-50	Scalping
5-minute	0.02	0.02	0.25	10-20	Day trading
15-minute	0.02	0.02	0.20	5-10	Intraday swings
1-hour	0.02	0.02	0.20	2-5	Swing entries
4-hour	0.02	0.02	0.20	1-2	Position timing
Daily	0.02	0.02	0.20	0.2-1	Long-term trends
Weekly	0.01	0.01	0.10	0.05-0.2	Major trends

Parabolic SAR Optimization #

Backtesting Considerations: #

Test different AF parameters across market conditions
Measure performance in trending vs. ranging markets
Analyze signal frequency vs. accuracy trade-offs
Consider transaction costs and slippage

Performance Metrics: #

Win rate in different market conditions
Average trade duration by timeframe
Maximum favorable/adverse excursion
Risk-adjusted returns by parameter set

Optimization Guidelines: #

Higher AF = More signals, more whipsaws
Lower AF = Fewer signals, smoother operation
Market volatility should influence parameter choice
Always test across bull, bear, and sideways markets

Parameter Sensitivity: #

Start AF most important for signal timing
Max AF affects trend capture length
Increment affects acceleration speed
Small changes can significantly impact results

FAQs #

How is Parabolic SAR different from moving averages? #

Parabolic SAR provides dynamic support/resistance that accelerates with time and price momentum, while moving averages provide smoother, average-based levels. SAR is more responsive to trend changes but generates more false signals in ranging markets.

What are the best Parabolic SAR settings? #

The standard 0.02, 0.02, 0.20 settings work well for most applications. More volatile markets might use 0.03, 0.03, 0.25, while trending markets might use 0.01, 0.01, 0.10 for smoother signals.

How do you avoid SAR whipsaws? #

Use trend filters like moving averages, require volume confirmation, avoid trading in clearly ranging markets, and consider using less sensitive settings. Multiple timeframe analysis also helps filter poor signals.

Can Parabolic SAR be used as a standalone system? #

While SAR provides complete entry and exit signals, it performs better when combined with trend filters or momentum indicators. Pure SAR systems work best in strongly trending markets.

How do you set position size with SAR signals? #

Calculate position size based on the distance to the SAR stop level. Use a fixed percentage of capital at risk, divided by the distance from entry to SAR stop, to determine shares/contracts.

Does SAR work better on certain timeframes? #

SAR tends to work better on longer timeframes where trends are more sustained. Very short timeframes generate many false signals, while very long timeframes may be too slow for active trading.

How do you handle SAR in gap situations? #

Gaps can cause SAR to reset or give false signals. Consider the gap’s significance and whether it represents a continuation or reversal pattern. May need to manually adjust SAR calculations after significant gaps.

Tips for Success #

Master Market Structure: Learn to identify trending vs. ranging market conditions
Use Trend Filters: Combine SAR with moving averages or other trend indicators
Respect the Stops: Always use SAR levels as trailing stops – that’s their strength
Volume Confirmation: Look for volume support on SAR reversal signals
Multiple Timeframes: Check higher timeframes for trend context
Parameter Adaptation: Adjust settings based on market volatility and timeframe
Risk Management: Calculate position size based on SAR stop distance
Patience with Signals: Wait for clear SAR reversals, not just touches
Avoid Overtrading: Not every SAR reversal deserves a trade
Practice Recognition: Learn to spot strong vs. weak SAR patterns

Conclusion #

Parabolic SAR stands as one of the most practical and visually intuitive trend-following indicators in technical analysis, offering traders a complete system for trend identification, entry signals, and dynamic stop-loss placement. Its unique acceleration feature and stop-and-reverse methodology provide a systematic approach to capturing trending moves while protecting profits through automatic trailing stops.

The indicator’s greatest strength lies in its simplicity and objectivity – there’s no ambiguity about trend direction or stop-loss levels when using SAR. This makes it particularly valuable for traders who prefer mechanical systems and want to remove emotional decision-making from their trading process.

Success with Parabolic SAR requires understanding its limitations in ranging markets and learning to combine it with appropriate filters and confirmation techniques. While it may generate more signals than some indicators, its built-in risk management through trailing stops and clear trend direction make it an invaluable tool for systematic trend following.

Remember: Parabolic SAR’s true power emerges when you embrace its systematic nature and use it as both a signal generator and risk management tool. By focusing on strong trending conditions and combining SAR with appropriate filters, traders can harness one of technical analysis’s most practical tools for riding trends while protecting capital through disciplined stop-loss management.

Entry/Exit Signals, Stop Loss Placement, Trailing Stop, Trend Indicator, Trend Reversal Detection