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Parabolic SAR (Stop and Reverse), developed by J. Welles Wilder, is a trend-following indicator appearing as series of dots on chart, identifying potential trend reversal points and providing trailing stop levels. SAR dots below price indicate uptrend, above price indicate downtrend.
Uptrend SAR: SAR(n) = SAR(n-1) + AF × [EP - SAR(n-1)] Downtrend SAR: SAR(n) = SAR(n-1) - AF × [SAR(n-1) - EP] Where: AF = Acceleration Factor, starts at 0.02, increases by 0.02 each new high/low, max 0.20 EP = Extreme Point, highest high in uptrend, lowest low in downtrend Trend Reversal: When price crosses SAR dots
Standard Parabolic SAR (0.02, 0.20): Most commonly used parameters
Sensitive Parabolic SAR (0.02, 0.25): Faster acceleration, more sensitive
Conservative Parabolic SAR (0.01, 0.15): Slower acceleration, more stable
SAR with Trend Indicators: Filters false signals
SAR Dots Below Price: Uptrend, hold long or seek buying opportunities
SAR Dots Above Price: Downtrend, hold short or seek selling opportunities
Price Crosses Below SAR: Trend changes from up to down, sell signal
Price Crosses Above SAR: Trend changes from down to up, buy signal
SAR Dots Accelerating Up/Down: Trend accelerating, momentum strengthening
SAR Dots as Stop Loss: Dynamic trailing stop, protects profits
Parabolic SAR works best in trending markets, generates frequent false signals in ranging markets. SAR dots serve as excellent trailing stops, automatically adjusting as trend develops. Many traders combine Parabolic SAR with ADX, using SAR signals only when ADX > 25 (strong trend). SAR reversal signals can be used to close existing positions or open reverse positions. In strong trends, SAR dots accelerate, reflecting strengthening trend momentum.
Provides clear entry and exit signals, automatic trailing stops, visually intuitive, suitable for trend following, simple to use
Generates many false signals in ranging markets, may exit strong trends prematurely, parameter settings significantly affect results, not suitable for range trading, requires combination with trend strength indicators
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