Parabolic SAR

Stop and Reverse dots that trail price -- how the acceleration factor works and when PSAR whipsaws.

What is the Parabolic SAR?

The Parabolic SAR (Stop and Reverse) is a trend indicator that places dots above or below the price on each candle. Dots below the price indicate an uptrend -- they serve as trailing stop levels that move up over time. Dots above the price indicate a downtrend -- they serve as trailing stop levels that move down.

When the price touches or crosses the SAR dots, the indicator "reverses" -- the dots flip from below to above (or vice versa), signaling a potential trend change. This flip is the "Stop and Reverse" moment that gives the indicator its name.

Parabolic SAR was developed by J. Welles Wilder (the creator of RSI and ADX) as a system for setting trailing stops that automatically tighten as a trend progresses.

During the uptrend, SAR dots trail below the candles and accelerate upward. When a candle drops through the dots, they flip above -- signaling a reversal to a downtrend.

How It Works

The SAR value is calculated using an "acceleration factor" (AF) that starts small and increases as the trend continues:

SAR update (uptrend)

SAR = previous SAR + AF * (extreme point - previous SAR)

In plain English: on each candle, the SAR moves toward the extreme point (the highest high during an uptrend, or the lowest low during a downtrend). The acceleration factor controls how fast it moves. As the trend extends, the AF increases, making the SAR close in on the price more quickly -- like a parabolic curve that accelerates toward the price.

The Acceleration Factor

The acceleration factor is the key mechanism of Parabolic SAR. It controls how aggressively the SAR dots chase the price:

Start (default: 0.02)

The AF begins at this value when a new trend starts (dots flip). A lower start means the SAR initially stays further from the price, giving the trend more room to develop.

Step / Increment (default: 0.02)

Each time the price makes a new extreme (new high in an uptrend, new low in a downtrend), the AF increases by this amount. This causes the SAR to accelerate toward the price as the trend progresses.

Maximum (default: 0.20)

The AF caps at this value. Once reached, the SAR continues to approach the price at this maximum rate but does not accelerate further. This prevents the SAR from catching up too quickly in extended trends.

With the default settings, the AF starts at 0.02 and increases by 0.02 each time a new extreme is set, capping at 0.20. This means the SAR initially gives the price plenty of room and gradually tightens -- like a trailing stop that becomes more protective as profits accumulate.

The parabolic shape

The name "Parabolic" comes from the shape of the SAR dots. Because the acceleration factor increases over time, the dots curve toward the price in a parabolic arc. Early in a trend, the dots are far from the price. As the trend extends, they close in faster and faster until the price eventually hits them -- triggering the reversal.

Using Parabolic SAR

As entry/exit signals

The simplest approach: when dots flip from above to below price, enter a long position. When they flip from below to above, exit the long (or enter a short). This keeps you in the market at all times, alternating between long and short positions -- which is why it is called "Stop and Reverse."

As a trailing stop level

Use the SAR dots as a dynamic trailing stop reference. In an uptrend, the dots below the price show where you might place your stop. As the trend progresses, the dots move up, locking in more profit. When the price hits the dots, the trade exits.

Things to Watch Out For

Whipsaws in ranging markets

This is Parabolic SAR's biggest weakness. When the price moves sideways, the dots flip back and forth rapidly -- above, below, above, below -- generating a series of losing signals. Each flip is a false reversal. Pairing PSAR with a trend-strength indicator like ADX can help: only act on PSAR flips when ADX confirms a trend is present (above 25).

PSAR assumes you are always in the market

The original system reverses position at every flip -- you are always either long or short. In backtesting, this means no idle periods and 100% exposure. This may not suit all strategies. You can use PSAR as a filter or exit signal without following every reversal.

Parameter sensitivity

Small changes to the start, step, or maximum AF values can significantly change the behavior. A larger step (e.g., 0.03) makes the SAR catch up faster, producing tighter stops but more frequent reversals. A smaller step (e.g., 0.01) gives the trend more room but may exit too late. Parameter optimization can help find settings that work for your specific asset and timeframe.

Where to Go Next

ADX -- pair with PSAR to filter out whipsaws in ranging markets.

MACD -- an alternative trend indicator with different signal mechanics.

Stop-Loss, Take-Profit & Trailing Stops -- how PSAR relates to other exit mechanisms.

Trend Indicators Overview -- all 12 trend indicators available in Simula.