The Parabolic SAR Indicator: How to Spot Trend Reversals and Trailing Stops
The Parabolic SAR Indicator: How to Spot Trend Reversals and Trailing Stops
The Parabolic Stop and Reverse (Parabolic SAR) Indicator is a trend-following tool that helps traders identify potential reversals and set dynamic stop-loss levels. Developed by J. Welles Wilder, it is widely used for trailing stops and capturing strong trends.
In this guide, we’ll break down how Parabolic SAR works, how to use it effectively, and the best trading strategies.
What Is the Parabolic SAR Indicator?
The Parabolic SAR plots dots above or below price action, indicating trend direction and potential reversals.
How to Interpret Parabolic SAR:
- Dots below price → Uptrend (buy signal).
- Dots above price → Downtrend (sell signal).
- Dots flip direction → Possible trend reversal.
Unlike other indicators, Parabolic SAR adjusts dynamically as price moves, making it ideal for trending markets.
How the Parabolic SAR Is Calculated
The Parabolic SAR formula involves an Acceleration Factor (AF) and Extreme Price Point (EP):
[
SAR = \text{Previous SAR} + \text{AF} \times (\text{EP} – \text{Previous SAR})
]
Where:
- AF (Acceleration Factor) starts at 0.02 and increases to 0.20 as the trend strengthens.
- EP (Extreme Price Point) tracks the highest or lowest price in the trend.
- SAR adjusts as price moves, making it useful for setting trailing stops.
How to Use Parabolic SAR in Trading
Identifying Trend Direction
- Buy when SAR dots appear below price (uptrend confirmation).
- Sell when SAR dots appear above price (downtrend confirmation).
Parabolic SAR Trend Reversal Strategy
- If SAR dots flip from above to below price, it signals a bullish reversal.
- If SAR dots flip from below to above price, it signals a bearish reversal.
Using Parabolic SAR for Trailing Stops
- In an uptrend, move stop-loss to match SAR dots below price.
- In a downtrend, move stop-loss to match SAR dots above price.
Best Parabolic SAR Trading Strategies
Parabolic SAR + Moving Average Strategy
- Buy when SAR dots are below price and price is above the 50-day SMA.
- Sell when SAR dots are above price and price is below the 50-day SMA.
Parabolic SAR + RSI Strategy
- Buy when SAR flips bullish and RSI is below 30 (oversold).
- Sell when SAR flips bearish and RSI is above 70 (overbought).
Parabolic SAR + MACD Strategy
- Use MACD crossovers to confirm Parabolic SAR trend shifts.
- If SAR is bullish and MACD is above zero → Strong buy signal.
- If SAR is bearish and MACD is below zero → Strong sell signal.
Best Parabolic SAR Settings for Different Trading Styles
- Day Trading: Use a 0.03 AF for quicker trend detection.
- Swing Trading: Default 0.02 AF for balanced trend-following.
- Long-Term Investing: Use a 0.01 AF to smooth out signals and reduce noise.
Common Parabolic SAR Mistakes to Avoid
❌ Using SAR in range-bound markets – Works best in strong trends.
❌ Ignoring price confirmation – Always confirm with moving averages or RSI.
❌ Overreacting to reversals – Look for confirmation before entering trades.
Final Thoughts – Should You Use the Parabolic SAR Indicator?
The Parabolic SAR Indicator is a powerful trend-following tool that helps traders spot trend reversals, set dynamic stop-losses, and capture strong trends. When used with RSI, MACD, or moving averages, it enhances trade accuracy and risk management.
📌 Want to Trade With the Parabolic SAR Indicator?
Try applying Parabolic SAR settings on different assets and test how it performs in trending vs. ranging markets!
