Parabolic SAR

Parabolic SAR (Stop and Reverse) is a trend-following indicator developed by J. Welles Wilder Jr. It places dots above or below price candles to indicate trend direction. Dots below price signal an uptrend, while dots above signal a downtrend. When the dots flip sides, it signals a potential trend reversal.

How Parabolic SAR Is Used in Trading

The SAR dots serve as a natural trailing stop-loss. In an uptrend, the dots rise progressively beneath price, tightening the stop as the trend matures. When price crosses below the SAR level, the system signals to close the long position and potentially reverse to short.

The parabolic acceleration factor means stops tighten faster as the trend continues. This is advantageous in trending markets but can produce whipsaws in sideways markets. Pairing SAR with ADX helps filter signals: only follow SAR reversals when ADX confirms a strong trend.

Algorithmic traders often use SAR for automated exit management rather than entries. Once a position is established using other signals, SAR provides a systematic, non-discretionary exit mechanism that locks in profits as trends progress.

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