Parabolic SAR

What Is Parabolic SAR?

Parabolic SAR (Stop and Reverse) is a trend-following indicator developed by J. Welles Wilder Jr. that provides potential entry and exit points. The indicator appears as a series of dots placed either above or below the price bar. When the dots are below price, the trend is considered up; when above, the trend is considered down. When the dots flip from one side to the other, it generates a reversal (or "stop and reverse") signal.

The "parabolic" name comes from the shape the dots create as they accelerate toward price during extended trends. An internal acceleration factor causes the dots to move closer to price as the trend progresses, creating a curved trajectory that eventually intersects with price.

How Traders Use Parabolic SAR

The most straightforward use is as a trend-following system. When the dots flip below price, enter a long position. When they flip above, close the long and enter a short. This "always in the market" approach works well in strongly trending markets but generates many whipsaws in sideways conditions.

Trailing stops based on Parabolic SAR are popular because the dots provide a clear, objective stop level that automatically tightens as the trend matures. Early in a trend, the dots trail at a wider distance, giving the position room to breathe. As the trend extends and the acceleration factor increases, the dots move closer to price, locking in profits.

Exit management is where many traders find the most value. Even traders who do not use Parabolic SAR for entries appreciate its disciplined exit mechanism. When a trend reversal becomes inevitable, the accelerating dots ensure that the trailing stop catches up to price before too much profit is surrendered.

Combining Parabolic SAR with Other Indicators

Parabolic SAR's main weakness is poor performance in ranging markets, where it generates frequent costly whipsaws. The most common solution is combining it with a trend strength indicator like ADX. Only trade Parabolic SAR signals when ADX is above 25, indicating a trending environment. When ADX is below 20, ignore SAR signals or switch to a range-trading approach.

Another effective combination is using a longer-term moving average as a trend filter. Only take long SAR signals when price is above the 200-day moving average, and only take short signals when price is below it.