Overlays · Indicator
Parabolic SAR plots dots that trail behind price, tightening as a trend matures and flipping to the other side when the trend reverses.
Overview
Parabolic Stop and Reverse, developed by J. Welles Wilder, draws a series of dots that appear above price in downtrends and below in uptrends. The dots trail the market at a distance that shrinks as the trend continues, so the indicator gives ground early in a move and then closes in as the move extends. When price reaches the dot, the indicator flips to the other side and the trend is considered reversed, which is where the 'stop and reverse' name comes from.
The mechanism is the acceleration factor. Each time the trend reaches a new extreme, the factor increases by the step amount, up to a maximum. A higher factor pulls the dots towards price faster. The acceleration factor tightens the stop as the trend matures, flagging potential reversals, which encodes the idea that a trend which has run a long way deserves a tighter stop than one that has just begun.
The indicator is unusual in that it is always in the market: there is no neutral state, only long or short. That design makes it a natural trailing-stop tool and a poor standalone entry system, because in a sideways market it flips constantly. Most traders use the dots to manage an existing position rather than to decide whether to take one.
How it is calculated
While the trend is up, each new SAR value moves from the previous one towards the extreme point, which is the highest high recorded since the trend began, by a fraction equal to the acceleration factor. While the trend is down, it moves towards the lowest low. The factor starts at the step value and increases by the step each time a new extreme point is set, capped at the maximum.
When price trades through the SAR, the position flips: the new SAR starts at the extreme point of the trend just ended, the acceleration factor resets to the step, and a new extreme point begins accumulating in the other direction.
Uptrend: SAR[i] = SAR[i-1] + AF * (EP - SAR[i-1]) Downtrend: SAR[i] = SAR[i-1] - AF * (SAR[i-1] - EP) EP = highest high of the current uptrend, or lowest low of the current downtrend AF starts at Step, increases by Step on each new EP, and is capped at Max On a flip: SAR = prior EP, AF resets to Step, trend direction inverts
Inputs
How to read it
The side the dots are on is the indicator's entire directional message: dots below price means the indicator considers the trend up, dots above means down. There is no strength reading and no scale, only position, so PSAR is best treated as a binary state rather than a measurement.
The gap between the dots and price is a rough gauge of how much room the current trend has. A wide gap early in a move means a large adverse excursion would be needed to flip it; a narrow gap late in a move means the flip is close, which is exactly the design intent of the accelerating factor.
Because a flip happens the moment price touches the level, the indicator reacts to intrabar extremes rather than closes. That makes it responsive but also sensitive to single wicks, so many traders confirm a flip with a close beyond the level rather than acting on the touch itself.
Signals to look for
Dots moving from one side of price to the other marks the indicator's trend reversal. Taken alone it is a noisy signal, so it is usually filtered by a trend measure such as ADX or a longer moving average.
The most common use is as a mechanical trailing stop for an existing position, with the dot level updated each bar. This uses the indicator's tightening behaviour without relying on it for entries.
Dots closing rapidly on price after an extended run indicate the acceleration factor is near its maximum, which traders read as a trend that has little room left before the indicator exits.
Limitations
Frequently asked questions
Parabolic SAR plots dots that trail behind price, tightening as a trend matures and flipping to the other side when the trend reverses.
The side the dots are on is the indicator's entire directional message: dots below price means the indicator considers the trend up, dots above means down. There is no strength reading and no scale, only position, so PSAR is best treated as a binary state rather than a measurement.
Dot flip: Dots moving from one side of price to the other marks the indicator's trend reversal. Taken alone it is a noisy signal, so it is usually filtered by a trend measure such as ADX or a longer moving average.
In sideways markets PSAR whipsaws severely, flipping every few bars and producing a stream of losing signals. It has no filter for the absence of a trend because it is always in the market.
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