Parabolic SAR in Trading: Calculation, Settings and Signals

What Is the Parabolic SAR?

The Parabolic SAR is a trend-following indicator by J. Welles Wilder. SAR stands for "stop and reverse". In an uptrend the SAR lies below the price, in a downtrend above it. If the price touches the SAR, the indicator flips sides: the old position is closed, and the SAR shows the new direction.

In most charting programs the SAR appears as a series of dots. It owes its name to its shape: with every new candle in the trend, the SAR moves closer to the price faster, and the dots form a curve resembling a parabola. Wilder developed it as a stop that follows not only the price but also time: the longer a trend lasts without forming new extremes, the closer the stop comes.

How Do You Calculate the Parabolic SAR?

The SAR is updated candle by candle. Each time it advances by a fraction of the distance to the extreme point of the trend, and this fraction grows with every new extreme. Wilder called it the acceleration factor.

1. Extreme point (EP): in an uptrend the highest high since the start of the trend, in a downtrend the lowest low.
2. Acceleration factor (AF): starts at 0.02 and rises by 0.02 with every new extreme, up to a maximum of 0.20.
3. New SAR: SAR of the previous candle plus AF times (EP minus SAR of the previous candle). In an uptrend the SAR may not lie above the lows of the last two candles, in a downtrend not below their highs.
4. Flip: if the low of a candle falls below the SAR (uptrend) or the high rises above it (downtrend), the direction flips. The new SAR is then the previous extreme point, and the AF starts again at 0.02.

Unlike with the Supertrend, a wick through the SAR is enough for the flip; a close on the other side is not required. The SAR therefore reacts faster, but also flips more often.

What Does the Parabolic SAR Show About the Market?

The Parabolic SAR shows the direction of the trend and a stop that follows this trend ever more tightly. It answers the question of whether a trend still has enough momentum: if the price stops moving on, the SAR catches up with it quickly.

Wilder designed it for traders who are always in the market, sometimes long, sometimes short. In a trend that is a strength, because the stop moves along and secures profits. In sideways phases it is a weakness: the SAR then flips constantly and produces many small losses. Wilder therefore intended it for trending phases, and many traders combine it with a measure of trend strength.

Which Settings Are Common?

Two values control the SAR: the step of the acceleration factor and its maximum. Wilder's standard is 0.02 for start and step and 0.20 as the maximum. Larger values make the SAR move up faster, smaller ones more slowly.

As with the Supertrend, there is no best setting. Anyone who changes the values should check how often the SAR would have flipped in recent months and how many of these flips were reversed after a few candles.

Which Signals Does the Parabolic SAR Give?

The Parabolic SAR gives two kinds of hints: the flip of sides and the stop that follows the trend. A third field of use is the combination with a trend filter.

Flip of Sides

If the price rises above the SAR in a downtrend, the SAR jumps below the price, to the lowest point of the previous downtrend. That argues for a beginning uptrend. Conversely, a fall below the SAR in an uptrend argues for a beginning downtrend. Because the SAR lies close to the price, the flip comes earlier than with slower trend followers, but also more often wrongly.

The SAR as a Trailing Stop

Anyone holding a position in the trend can use the SAR as a stop: in an uptrend it lies below the price and rises with every candle. If the trend runs strongly, the stop moves up quickly and secures a large part of the profit. If the trend stalls, the SAR catches up with it, and the position is closed.

Combination with a Trend Filter

Because the SAR produces many flips in sideways phases, many traders combine it with a filter, such as a moving average or a measure of trend strength like the ADX. Only flips in the direction of the filter are then traded; the rest serve only as exits.

When Does a SAR Flip Confirm, and When Does It Not?

A flip is confirmed when the price keeps running in the new direction over the following candles and forms new extremes, so that the SAR can move up. It fails when the price falls back after a few candles and touches the SAR again. With an indicator that already reacts to a wick, this is common.

On the chart the price falls over many candles, with the SAR following it from above. Then the high of the flip candle rises to 104.51 and thus above the SAR at 103.84; the candle opens at 103.40 and closes at 104.30. The SAR jumps below the price to 102.35, the lowest low of the previous decline. The next candles close at 103.80 and 102.80, and three candles after the flip the low falls to 101.52 below the SAR at 102.44. The SAR flips back above the price to 104.51, and the decline continues to the close of 97.50 at the right edge.

How do you spot the failure early? The flip came out of a short rise after a long decline, without the price forming one higher high after another. Already the candle afterwards closed lower, and the SAR could barely move up. A flip that is not followed by new extremes quickly loses its meaning.

Example of Entry, Stop, and Target

The following example shows an upward flip of the Parabolic SAR at the end of a downtrend. It is a teaching example, not a recommendation for a particular market.

The price falls from the swing high at 106.62 over more than fifteen candles, with the SAR following it from above. After the bottom, the high of the flip candle rises to 101.64 and thus above the SAR, which stood at 101.46 in this candle; the candle opens at 100.60 and closes at 101.50. The SAR jumps below the price to 100.17, the lowest low of the decline.

The entry is the close of the flip candle at 101.50. The stop lies 0.10 below the SAR at 100.07, so the risk is 1.43 points. The target is the swing high at 106.62 where the decline began; the distance is 5.12 points, and the reward-to-risk ratio is about 3.6 to 1. The price reaches the target twelve candles after the entry. Anyone trailing the stop with the SAR has raised it to 102.79 by then.

How Do You Use the Parabolic SAR Across Multiple Timeframes?

On short timeframes the SAR flips very often, because a wick is enough. On the higher timeframes flips are rarer and carry further. Many traders therefore use the direction of the SAR or of the trend on a higher timeframe as a filter.

If the trend on the 4h and 1d charts points up, an upward flip of the SAR on the 1h chart after a pullback is an entry in the direction of the trend. A downward flip on the 1h chart is then more a signal to secure profits than a reason for a counter-position. On the signal page and in the cockpit you can see the trend on all eight timeframes and check whether a flip runs with or against the bigger picture.

How Do News and Scheduled Events Affect the Parabolic SAR?

Because a wick is enough to trigger the flip, the SAR reacts particularly sensitively to price jumps after news. A short spike after a figure can make the SAR flip, even if the price runs back immediately afterwards. The new SAR then lies at the old extreme point, often far from the price.

So check in the economic calendar whether a flip formed at the time of a release. The news situation in the cockpit also shows whether the reports support the new direction. A flip that arose only from a wick after a piece of news carries little weight.

How Do You Use the Parabolic SAR in the Four Trading Styles?

In all styles the Parabolic SAR is above all an exit tool. As an entry it is only suitable in trending phases and with a filter.

The Parabolic SAR in Scalping

In scalping on the 15m and 30m charts, the SAR flips very often, in quiet phases such as the Asian session with almost every countermove. Many scalpers therefore use it only as an exit: they hold a position as long as the SAR is on the right side and close it on the flip.

Only flips in the direction of the 1h or 4h trend are suitable as entries. The stop sits just beyond the SAR and is tight, so spread and fees make up a noticeable part of the risk. The London and New York opens bring the movement in which the SAR works best. Anyone using it this way needs a clear rule about which flips to take into account at all.

Positions are held for minutes to a few hours. Around high-impact releases scalpers avoid the SAR, because a wick after the figure triggers it. In cryptocurrencies, thinly traded weekends produce many flips. The time commitment is high; the style suits traders who decide quickly and can tolerate many small losses.

The Parabolic SAR in Day Trading

In day trading on the 1h and 2h charts, the SAR is a usable trailing stop. Anyone holding a position after a morning breakout trails the stop with the SAR, which moves up faster with every new candle.

Entries after a flip are worthwhile mainly when the 4h chart shows the same direction. The stop sits just beyond the SAR, and the target at the next zone. Positions are closed before the end of the session, so overnight gaps play no role. A flip in the late afternoon is rarely still worth an entry. After a fast rise the SAR moves so close that even a short pullback triggers it; anyone who wants to stay in longer takes the trend of the 4h chart as a second yardstick.

Releases in the calendar are the most common reason for flips that do not hold. In the quiet midday period before the New York open, the SAR often flips without meaning. The style suits traders who can follow the market attentively for a few hours a day and want a fixed exit rule.

The Parabolic SAR in Swing Trading

In swing trading on the 4h and 8h charts, the SAR works well in clear trends. An upward flip after a longer decline, confirmed by the 1d chart, is a possible entry, and the SAR provides the stop at the same time.

Because the SAR moves up over time, it closes positions that run sideways after a strong swing fairly quickly. That protects profits but can also exit too early when the trend is only catching its breath. Positions are held for days to a few weeks; overnight financing and weekend gaps are part of it. One way out is to bridge pauses in the trend with a zone of the 4h chart and to exit only when this zone breaks.

The comparison with the 1d chart is important: a flip on the 4h chart against the daily trend is often just a countermove. If a central bank meeting falls within the holding period, a smaller position can make sense. The style suits traders with little time during the day who want to follow a fixed exit rule.

The Parabolic SAR in Position Trading

In position trading on the 12h and 1d charts, the SAR with the standard setting is often too fast: it moves up so quickly that it ends long trends at the first larger countermove. Many position traders therefore use smaller values for step and maximum.

The stop then lies further away, and the position is correspondingly small. A flip on the 1d chart after a trend lasting weeks is a clear sign that the trend has lost momentum. Positions are held for weeks to months.

At this level the news situation counts for more than in short-term trading. A flip that coincides with a turn in monetary policy carries more weight than one without a fundamental background. The time commitment is low; the style suits traders who can tolerate large pullbacks.

Parabolic SAR or Supertrend?

Both indicators follow the trend and flip sides when it turns. The Parabolic SAR moves up faster with time and with every new extreme and already reacts to a wick. The Supertrend sets its distance by volatility and flips only on a close beyond the line.

Anyone who wants to secure profits early tends to choose the SAR; anyone who wants to hold a trend as long as possible tends to choose the Supertrend. Some traders use both: the Supertrend for direction, the SAR for the exit.

What Mistakes Are Common with the Parabolic SAR?

• Trading every flip in a sideways market: the SAR flips constantly there, and every flip costs spread and a small loss.
• Entering without a trend filter: the SAR is designed for trending phases. A filter such as a moving average helps to identify them.
• Choosing too fast a setting: a high maximum ends trends at the first pause.
• Not trailing the stop: anyone using the SAR as an exit has to adjust the stop with every candle.
• Overlooking releases: a wick after a figure triggers flips that are immediately reversed.
• Forgetting the position size: right after a flip the SAR sits at the old extreme and can be far away, see risk management.

How Parabolic SAR Triggers Are Named in FinScans Signals

On the signal page, these triggers appear in the trigger table, each with an arrow: ▲ means FinScans counts the trigger on the bullish side, ▼ on the bearish side. Two names belong to this page:

• “SAR Flip Bullish” (▲): The Parabolic SAR flips to the side below the price.
• “SAR Flip Bearish” (▼): The Parabolic SAR flips to the side above the price.

A signal contains at most one of the two names. They mostly appear in signals of their own direction, but noticeably more often than many other triggers also in signals of the opposite direction: a flip of the SAR alone rarely determines the direction of a signal.

The signal page shows no class for indicators. Such a trigger never stands alone: FinScans combines it with the other triggers of the same signal into an overall direction. Whether the signal runs with or against the larger move is shown by the trend across the eight timeframes and the overall assessment.

The following block shows current data on these triggers. The hit rate should always be read relative to the average: if it is above, the trigger has a statistical edge; if it is below, it is better used as a hint than as the sole reason to enter. The rates can vary considerably by trading style, because there is more noise on short timeframes. The distances to target and stop also play a role: a tight stop is hit more often than a wide one, a distant target less often than a near one.

What the Machine Reports, What You Check Yourself

On the signal page, these triggers appear for forex and crypto pairs; their name describes the flip of the SAR, not the position in the larger picture. Whether a flip offers a viable setup is something you decide yourself in hybrid trading.

• The machine reports "SAR Flip Bullish" or "SAR Flip Bearish"; you check on the chart whether the market is trending or moving sideways.
• The signal page shows the trigger's arrow; you check whether the flip arose only from a wick or from a clear move.
• The machine provides the trend across eight timeframes; you check whether the flip runs in the direction of the higher timeframes.
• The data block shows the hit rate so far; you check in the economic calendar whether the flip arose from a price jump after a release.
• The signal page shows target and stop; you measure the distance to beyond the SAR and check whether the reward-to-risk ratio fits your risk management.
• You decide whether to trail the stop with the SAR or to set a fixed target.

Frequently asked questions

How Do You Read the Parabolic SAR?

If the dots lie below the price, the SAR shows an uptrend; if they lie above it, a downtrend. If the price touches a dot, the SAR flips sides and shows the new direction. The dots move closer to the price with every candle, which is why they are suitable as a trailing stop. In sideways phases, however, they flip very often.

Which Setting Is Common for the Parabolic SAR?

Wilder's standard is an acceleration factor that starts at 0.02, rises by 0.02 with every new extreme and reaches at most 0.20. Smaller values make the SAR move up more slowly and hold trends longer, larger ones secure profits earlier but produce more flips. There is no single best setting for all markets.

Why Does the Parabolic SAR Flip So Often?

Because it already reacts to a wick and moves up over time, even if the price does not move on. In sideways phases it therefore catches up with the price quickly and flips back and forth. It is designed for trending phases; a filter using a moving average or a measure of trend strength reduces the false flips.

What Is the Difference Between the Parabolic SAR and the Supertrend?

Both follow the trend and flip sides when it turns. The Parabolic SAR moves up faster with time and every new extreme and flips on a wick. The Supertrend sets its distance by volatility and flips only on a close beyond the line. The SAR secures profits earlier, the Supertrend holds trends longer.

Sources

• Wilder, J. Welles: New Concepts in Technical Trading Systems, Trend Research, 1978.
• Murphy, John J.: Technical Analysis of the Financial Markets, New York Institute of Finance, 1999.