Parabolic SAR

Summary

The Parabolic SAR (PSAR) is a trend-following stop-and-reverse system developed by J. Welles Wilder Jr. in 1978. It plots dots above or below price bars to signal trend direction and potential reversals. PSAR works best in clear trending markets, helping traders identify entries and trailing stops, but it can generate false signals in ranging markets. Two practical strategies—trend-following and trailing stop—are presented, along with key usage tips to apply PSAR effectively.

What Is Parabolic SAR?

Parabolic SAR, or “stop and reverse,” appears as dots above or below price bars. Dots below price indicate an uptrend; dots above signal a downtrend or potential reversal.

Calculation Logic

1. Extreme Point (EP): Highest high in an uptrend or lowest low in a downtrend.
2. Acceleration Factor (AF): Starts at 0.02, increases by 0.02 on new EPs, capped at 0.20.
3. Formula:
   SAR_n+1=SAR_n+AF×(EP−SAR_n)
   Bound within current/previous period’s price range.
4. Trend Reversal: When next SAR value crosses price range, trend flips and SAR resets to prior EP with AF = 0.02.

Two Practical Strategies

1. Trend-Following: Enter on dot flip below price (buy) or above price (sell).
2. Trailing Stop: Use SAR dots as trailing stops, moving stop each period to new SAR dot.

Tips & Cautions

Use only in trending markets; avoid in choppy ranges.

Combine with ADX or moving averages to confirm trend.

Adjust AF for desired sensitivity (short-term vs. long-term).

Validate signals across multiple timeframes (daily, 4H, 1H).

Watch volume for confirmation of trend continuation.