Parabolic SAR is a trend-following indicator that plots a series of dots above or below price. SAR stands for “stop and reverse,” which describes its original purpose: it acts like a trailing stop that follows price, and when price crosses the dots, the indicator flips sides and signals a possible trend change. In practice, the dots represent a dynamic stop level that moves closer to price as the trend continues.
What it measures is not momentum in the oscillator sense, and it is not volatility directly. It measures trend persistence through a mechanically tightening stop line. In a clean uptrend, dots stay below price and step upward over time. In a clean downtrend, dots stay above price and step downward, gradually tightening as the move extends.
Because it is stop-based, Parabolic SAR naturally performs best when price trends in a steady way. It tends to struggle when price chops sideways because repeated crosses trigger frequent flips. That whipsaw risk is not a bug; it is a predictable outcome of using a tight trailing stop logic in a non-trending regime.
How Parabolic SAR is calculated
Parabolic SAR is calculated iteratively, meaning each new value depends on the previous value and the most extreme price reached during the current trend. The formula is simple to write, but it helps to understand what each variable does. The core idea is: SAR moves toward the current trend’s extreme point at a rate controlled by an acceleration factor.
A simplified version for an uptrend is:
SAR(t) = SAR(t−1) + AF × (EP − SAR(t−1))
Where:
- SAR(t) is today’s SAR value
- SAR(t−1) is yesterday’s SAR value
- EP is the Extreme Point, the highest high reached so far in the current uptrend
- AF is the Acceleration Factor, which increases as the trend makes new highs
For a downtrend, the structure is the same, but EP becomes the lowest low in the current downtrend, and SAR moves downward toward it. The direction (uptrend or downtrend) is determined by where the dots are plotted relative to price. A reverse occurs when price crosses the SAR level, which flips the dots to the other side and resets parts of the calculation.
The acceleration factor is the control knob. It usually starts at a small value (the step) and increases by that step each time a new EP is made, up to a cap (the maximum). Conceptually: when a trend keeps making new extremes, the indicator accelerates and tightens faster, pulling the stop closer to price. When the trend stalls and stops making new extremes, AF stops increasing, so SAR continues to move but does not tighten as aggressively.
Most charting platforms hide the internal state handling, but you should know the practical meaning: step affects how quickly the dots close in, and maximum limits how tight they can get. Lower step and lower maximum make the indicator slower and more forgiving. Higher values make it more sensitive but also more likely to flip on normal pullbacks.
Most used settings and why traders choose them
The most common default settings are step 0.02 and maximum 0.20. These values are widely used because they offer a balanced behavior across many liquid markets and timeframes. They tend to keep dots far enough away to avoid constant flips in mild trends, while still tightening enough to protect profits when a trend extends.
Many traders adjust settings based on timeframe and the type of instrument. On higher timeframes, price swings can be larger in absolute terms but smoother relative to noise, so some traders keep defaults or slightly reduce sensitivity to avoid early exits. On lower timeframes, noise increases and trends can be shorter-lived, so the same default settings may flip too often unless paired with a regime filter.
A practical way to think about settings is to map them to your intent. If you want Parabolic SAR primarily as a trailing stop tool for staying in trends, you typically prefer slower settings (lower step or lower max) to reduce premature reversals. If you want it as a signal generator for frequent entries and exits, more sensitive settings might fit, but you must accept higher whipsaw rates and stricter filters.
Avoid the common trap of optimizing settings by backfitting one market phase. The indicator’s behavior changes dramatically between trending and ranging conditions, so a setting that looks perfect in a trend-heavy period can fail in a choppy sample. Your objective should be robustness: settings that behave predictably, combined with filters that decide when to use PSAR and when to ignore it.
How it behaves on charts and what signals look like
On charts, Parabolic SAR appears as a sequence of dots. In an uptrend, dots plot below price and usually rise in a curved, parabolic shape as the move extends. When price pulls back, the dots continue to rise but at a pace driven by AF and the distance to the extreme point. If price falls enough to cross the dot level, the dots flip above price and the trend state changes.
The basic signals are straightforward. Dots below price imply an uptrend state and a trailing stop level underneath. Dots above price imply a downtrend state and a trailing stop level overhead. A flip occurs when price crosses the SAR, which is often treated as an exit signal for the prior position and sometimes as an entry signal in the opposite direction.
In practice, the “flip as entry” approach is where traders run into trouble. In trending markets, flips can align with genuine reversals or at least meaningful pullback-to-reversal transitions. In range markets, flips often occur near the middle of a sideways band, producing a sequence of small losses. Interpreting the dots as a trend state marker rather than a prediction helps keep expectations realistic.
Another key behavior is the tightening effect late in trends. As new highs or lows are made, AF rises until capped, and dots can move close to price. That leads to earlier exits on normal mean reversion. This is not necessarily bad; it is the mechanism that locks in gains. The question is whether your broader system wants to exit quickly or allow wider pullbacks, and that decision should guide both settings and filters.
When it tends to work and why
Parabolic SAR tends to work best in markets that trend with relatively smooth swings. That includes sustained directional moves, strong breakouts that follow through, and downtrends with persistent lower highs and lower lows. In these regimes, the trailing-stop logic aligns with the market structure: letting profits run while cutting exposure when price breaks the trailing level.
It also tends to work better when volatility is not exploding in both directions. If volatility rises but remains directional, PSAR can still function because the extreme point keeps updating and the dots tighten as the trend persists. When volatility becomes two-sided with sharp up and down spikes, the probability of crossovers increases and the stop logic becomes fragile.
A reliable way to improve outcomes is to treat PSAR as an execution tool inside a trend filter, not as a stand-alone strategy. Trend filters can be as simple as price above a longer moving average for longs and below it for shorts, or a volatility-adjusted filter like an ATR threshold to avoid low-quality churn. When PSAR is applied selectively to trending conditions, its strengths show up more consistently.
When it tends to fail and why
Parabolic SAR tends to fail in sideways or mean-reverting markets. In a range, price repeatedly crosses the dot level because there is no sustained directional movement. Each crossover triggers a flip, which creates a sequence of entries and exits that are not supported by follow-through. The indicator is doing what it is designed to do, but the regime is incompatible with its assumptions.
It also struggles during sharp countertrend pullbacks within an otherwise trending move, especially when settings are sensitive. If the dots tighten too quickly, a normal retracement can trigger an exit, and price may resume the trend without you. This is less a wrong signal and more a mismatch between the indicator’s tightening stop and the market’s pullback depth.
Another failure mode appears around news-driven gaps and limit moves. Because the SAR level is calculated from prior values and extremes, a gap through the dot level can force a reversal signal that is purely mechanical. That reversal may be immediately negated if the gap is an overreaction. If you trade instruments prone to gaps, treat flips with extra caution and consider rules that require confirmation beyond a single crossover.
Practical rules for entries exits stops and filters
A pragmatic way to use Parabolic SAR is to separate its roles: trend state, trailing stop, and timing. The simplest and often most stable role is as a trailing stop for positions you already want to hold. For example, if you enter based on a breakout or a moving-average trend filter, PSAR can manage the exit by moving the stop as the trend develops. This reduces discretion and ensures your stop tightens as the trend extends.
If you do use flips as entries, add at least one regime filter. One common approach is a moving average filter: only take long flips when price is above a longer moving average and the average is rising, and only take short flips when price is below and the average is falling. Another approach is an ATR-based filter: require that current ATR is above a minimum relative threshold, so you avoid dead ranges where small oscillations trigger flips.
Stop placement depends on how you want PSAR to behave. If PSAR is your stop, the rule can be mechanical: for longs, stop at the current dot value and update each bar. For shorts, stop at the dot above price and update. If you want to reduce stop-outs from noise, you can place a buffer around the dot, such as a fraction of ATR, so price must cross by more than a minimal amount before you exit. The trade-off is clear: buffers reduce whipsaws but give back more on reversals.
Here is a compact rule set that stays practical without overfitting:
- Trend filter first: trade only in the direction of the higher-timeframe or longer moving average trend.
- Entry second: enter on a PSAR flip that aligns with the filter, or use PSAR only after a separate entry trigger.
- Exit third: trail using PSAR dots, optionally with an ATR buffer, and exit on a confirmed flip or on a separate profit-taking rule.
Position sizing and risk control matter more than tuning the step and maximum. Because PSAR exits can occur quickly in choppy periods, keep risk per trade consistent and assume that strings of small losses are possible. Your edge comes from participating in trends when they exist, not from forcing the indicator to behave well in ranges.
Summary
Parabolic SAR is a trend-following stop and reverse indicator that plots dots above or below price to indicate trend state and a trailing stop level. It is calculated iteratively by moving the SAR value toward the extreme point using an acceleration factor that increases with new highs or lows, capped by a maximum. Default settings like 0.02 step and 0.20 maximum are common because they balance sensitivity and stability across many charts.
On charts, dots below price imply an uptrend state and a rising trailing stop, while dots above price imply a downtrend state and a falling trailing stop. It tends to work best in steady trending regimes and tends to fail in ranges and noisy volatility where price crosses the dots repeatedly. The most practical use is as an exit and trailing stop tool inside a separate trend filter, with optional buffers and confirmation rules to reduce whipsaws.