Parabolic SAR (Stop and Reverse) was developed by Welles Wilder in 1978 alongside RSI and ATR. It provides a dynamic, accelerating stop loss system that keeps traders aligned with trends while automatically signalling when those trends may be ending. Its distinctive dot pattern above or below price makes it one of the most visually intuitive tools in technical analysis.
Wilder designed Parabolic SAR to provide a trailing stop that accelerates as a trend matures. The word 'parabolic' refers to the curve-like shape the stop creates as it accelerates toward price. 'SAR' stands for Stop and Reverse — when price hits the stop, you don't just exit, you reverse to the opposite direction.
For an uptrend: SAR(next period) = SAR(current) + AF × (EP – SAR(current)). Where AF is the Acceleration Factor (starts at 0.02, increases by 0.02 each time a new extreme point is set, maximum 0.20) and EP is the Extreme Point (highest high achieved during the current trend).
For a downtrend the logic is mirrored: SAR moves down toward price as the trend progresses, with EP being the lowest low of the trend.
The AF is the genius of Wilder's design. Starting at 0.02, it increases by 0.02 each time price makes a new extreme high (in an uptrend). This means the longer the trend runs and the more new highs it makes, the faster the SAR accelerates toward price. A brand new trend has a very loose trailing stop. A mature trend with many new highs has a tightly trailing stop — protecting more of the profit as the trend extends.
| AF Value | Meaning | SAR Tightness |
|---|---|---|
| 0.02 (initial) | New trend — very early stage | Wide stop, plenty of room |
| 0.06–0.10 | Trend establishing — 2–4 new extremes | Moderate trailing |
| 0.14–0.18 | Mature trend — many new extremes | Tight trailing stop |
| 0.20 (maximum) | Extended trend — AF capped | Maximum rate of acceleration |
Dots below price: uptrend is in progress. SAR acts as a rising trailing stop. Dots above price: downtrend is in progress. SAR acts as a falling trailing stop. The simplicity of this visual interpretation is one of SAR's greatest strengths — trend direction is immediately obvious.
When price crosses the SAR dots — closing below them in an uptrend, or above them in a downtrend — the indicator flips to the opposite side. This is both a stop-out signal and, in its pure form, a reversal signal to trade the other direction. However, most professional traders use SAR as a trailing stop and exit tool rather than a reversal entry system.
Wilder himself acknowledged that Parabolic SAR should not be used alone. In his original book 'New Concepts in Technical Trading Systems', he recommended combining SAR with his Directional Movement Index (DMI) to filter out ranging markets. This combination — entering only when ADX is above 25 and taking SAR signals only in the direction of the trend — remains one of the most powerful combinations in systematic trading.
The most practical professional use of Parabolic SAR is as a trailing stop for trend following positions. Enter the trade using a different signal (breakout, moving average cross, RSI divergence). Once in the trade, use the SAR dot as your trailing stop level. The SAR automatically moves to lock in more profit as the trend matures, without requiring manual adjustment.
The classic Wilder combination: Only take SAR signals when ADX is above 25 (confirming a trending market). Take bullish SAR signals only when ADX's +DI is above -DI. Take bearish SAR signals only when -DI is above +DI. This filter eliminates the majority of false signals in ranging markets.
Use a trend-defining moving average (50 or 200 EMA) as a primary filter. Only take bullish SAR signals when price is above the MA. Only take bearish SAR signals when price is below the MA. This simple rule eliminates counter-trend SAR signals that are the main source of false signals.
| Condition | SAR Signal | Action |
|---|---|---|
| Price above 200 EMA, ADX > 25 | Dots flip below price (bullish) | High quality long entry / add to longs |
| Price above 200 EMA, ADX < 20 | Dots flip below price | Weak signal — wait or skip |
| Price below 200 EMA, ADX > 25 | Dots flip above price (bearish) | High quality short entry |
| Price below 200 EMA | Dots flip below price (bullish) | Counter-trend — avoid |
In sideways, choppy markets, Parabolic SAR generates repeated false signals — the dots flip back and forth rapidly as price oscillates without a clear trend. This is the indicator's primary weakness. Each flip in a range triggers a stop loss and often a small loss. Without filtering, SAR in a range can produce a series of small, frustrating losses.
Wilder's default settings (AF step 0.02, max 0.20) can be adjusted. Using a smaller step (0.01) and lower maximum (0.10) creates a much looser SAR — fewer false signals but stops further from price. Using larger step values creates a tighter, more sensitive SAR. The right setting depends on the asset's volatility and the trader's holding period.
For highly volatile assets like crypto or small-cap stocks, loosening the SAR settings (smaller AF step, lower maximum) prevents premature stop-outs. For slow-moving instruments like bonds or defensive equities, the default settings often work well.