What Is the Parabolic SAR Indicator?
The Parabolic SAR — short for "Stop and Reverse" — is a trend-following indicator that drops dots above or below price to show you two things at once: which way the trend is running, and where your trailing stop should sit.
It plots directly on the price chart. Dots below the candles? Uptrend. Dots above? Downtrend. When the dots flip to the other side of price, the old trend is done and the new one starts in the opposite direction.
How the Parabolic SAR Is Calculated
The formula:
SAR = prior SAR + AF × (EP − prior SAR)
Two moving parts matter:
- EP (Extreme Point): the highest high in an uptrend, or the lowest low in a downtrend. The best price the trend has reached so far.
- AF (Acceleration Factor): starts at 0.02, increases by 0.02 every time a new EP prints, and caps at 0.20.
As the trend extends and makes new highs (or lows), the SAR accelerates toward price. The longer the trend runs, the tighter the trailing stop gets. The design gives the trend room early and squeezes it as it matures.
When price hits the SAR and flips, the indicator resets. The SAR jumps to the prior trend's EP, and the AF drops back to 0.02.
How to Use the Parabolic SAR in Trading
Treat the dots as two things: a mechanical trailing stop and a trend-change trigger.
- Trend direction: Stay long while the dots are below price. Stay short while the dots are above price.
- Entry trigger: A bullish flip happens when dots move from above price to below — that's your long signal. A bearish flip is the opposite: dots move from below to above. That's your short signal.
- Stop placement: Park your stop at the current SAR dot — below the dot for longs, above for shorts. As price runs, the dots trail forward, and your stop trails with them.
- Filter the whipsaws: In a range, the dots flip constantly and you bleed out taking every signal. Only take flips that line up with a higher-timeframe bias or a trend filter. Price above the 200 EMA for longs, below for shorts.
The Parabolic SAR is a trend tool. In a sideways market, it generates loss after loss. Identify the market type before trusting the dots.