Parabolic SAR Indicator

The Parabolic Stop and Reverse (SAR) indicator is a trend-following calculation plotted as points below price during an indicated uptrend and above price during an indicated downtrend. Its trailing level accelerates toward price as a trend makes new extremes.

The plotted SAR is not itself a stop order at a broker. A trader must separately choose whether and how to translate it into an executable order.

Key Takeaways

• Parabolic SAR maintains a trend state and a trailing reference level.
• The acceleration factor increases when price reaches a new extreme in the current trend.
• Common settings start at 0.02, increase by 0.02, and cap at 0.20.
• Repeated flips are common in sideways or volatile markets.
• A displayed dot is a calculation; actual stop execution can gap beyond it.

Core Formula

Within a trend:

where:

• AF is the acceleration factor.
• EP is the highest high reached in an indicated uptrend or the lowest low reached in an indicated downtrend.
• SAR is the current trailing level.

Standard implementations also constrain the next SAR so it does not penetrate recent price extremes. During an uptrend it is generally limited by prior lows; during a downtrend it is limited by prior highs. When price crosses the SAR, the trend state reverses, the level resets, and the acceleration sequence restarts. Platform details can differ.

Example

Assume an indicated uptrend has:

• current SAR: $50
• extreme point: $55
• acceleration factor: 0.02

The unconstrained next value is $50.10. The platform then applies its prior-low constraint. If price establishes a new high, the extreme point updates and the acceleration factor commonly increases by one step, up to its cap.

How Parabolic SAR Is Read

Parabolic SAR tends to behave best when price moves persistently in one direction. In a range, it can alternate sides and produce repeated losing trades.

Indicator Level Versus Stop Order

This distinction matters whenever SAR is described as a trailing stop.

How to Evaluate a SAR Rule

1. Confirm the initial acceleration factor, increment, maximum, reversal rule, and price data.
2. State whether SAR controls entry, exit, or only trend classification.
3. Check whether the market is trending or repeatedly crossing the indicator.
4. Model overnight gaps and the actual order type used.
5. Test after fees, spreads, slippage, borrowing costs, and missed fills.

Risks and Limitations

• Whipsaw: Sideways markets can create frequent reversals.
• Parameter sensitivity: Faster acceleration tightens the level but can increase premature exits.
• Gap risk: An actual order can fill far from the charted SAR.
• Trend dependence: The formula does not measure fundamental value or explain why a trend exists.
• Vendor differences: Initialization and extreme-point constraints may vary.
• Stop-and-reverse risk: Automatically reversing can double transaction frequency and create unintended short or leveraged exposure.

The CFTC Futures Glossary defines technical analysis and trend-related market terms. Investor.gov explains the execution behavior of market, limit, and stop orders. These sources do not endorse Parabolic SAR.

FAQs

Related Terms

• Trend Following: Rules designed to remain aligned with an established price direction.
• Stop Order: An order activated after a specified trigger is reached.
• Momentum: Direction and rate of price change over a selected period.
• Price Volatility: Variation in market prices over time.

This article is educational and does not provide personalized investment or trading advice. Parabolic SAR cannot guarantee an exit price or prevent a loss.