Parabolic SAR

Overview

Parabolic SAR (Stop and Reverse), another Wilder creation from 1978, plots dots above or below price to indicate trend direction and potential trailing-stop levels. The name “parabolic” comes from the curve the dots trace as a trend accelerates.

It’s deceptively simple: dots below price = uptrend, dots above price = downtrend. When price crosses through the dots, they flip to the other side — signalling potential trend reversal.

Formula

SAR(t+1) = SAR(t) + AF × (EP - SAR(t))

AF = Acceleration Factor (starts 0.02, increases by 0.02
     per new EP, capped at 0.20)
EP = Extreme Point (highest high in uptrend / lowest low in downtrend)

Default Settings

• Acceleration Factor start: 0.02
• Acceleration step: 0.02
• Maximum AF: 0.20

Higher acceleration values make SAR more sensitive (more frequent flips); lower values smooth it out.

How to Use It

1. Trend Direction

• Dots below candles → uptrend, hold longs
• Dots above candles → downtrend, hold shorts

2. Trailing Stop

The most powerful use. Set your trailing stop at the SAR dot:

• Long position: stop at the dot below price; as SAR moves up, ratchet stop up
• Short position: stop at the dot above price; ratchet stop down

Exit when price hits SAR — the indicator name “Stop and Reverse” literally suggests reversing direction at that point.

3. Trend Acceleration Visualisation

The gap between SAR and price widens in strong trends and narrows when momentum slows — visual cue for momentum exhaustion.

Strengths

• Best-in-class for trailing stops in trending markets
• Adapts to trend acceleration automatically
• Visually unambiguous — no interpretation needed
• Locks in profit as trend extends

Weaknesses & Common Mistakes

• Whipsaws in sideways markets — SAR flips constantly when no trend exists; many small losses
• Treating every flip as entry signal — better used as exit than entry
• Always “in the market” — the “reverse” logic forces a position; not appropriate for choppy conditions
• Late on quick reversals — SAR is reactive, doesn’t predict turns

Best Combinations

• SAR + ADX — use SAR signals only when ADX above 25 (confirmed trend)
• SAR + Moving Average — MA defines trend direction, SAR provides trailing stop
• SAR as trailing stop only — combine with separate entry method, use SAR exclusively for exits

Practical Example

GBP/USD H4, strong uptrend confirmed by ADX(14) = 32. Long entry on pullback to 20 EMA. SAR dot at 1.2780. As trend extends and SAR ratchets up to 1.2850, 1.2920, etc., move stop accordingly. Final exit when price hits SAR. Often captures 70–80 % of trend move without giving back gains.

Bottom Line

Parabolic SAR is a trend-rider’s exit tool, not a market-timing oracle. Use it to manage trades, not to predict them.