What Is the Parabolic SAR?
The Parabolic SAR plots a dot above or below each bar. While a trend runs the dot moves toward price by an acceleration factor that increases each time a new extreme is made, and when price reaches the dot it flips to the other side and the trend is treated as reversed.
The dots. Almost everyone has had them on a chart at some point, usually without knowing they are looking at a stop that speeds up.
How it works
SAR stands for stop and reverse, and the name is the whole design: the dot is a stop, and when price reaches it the position is meant to turn around rather than close.
The dot moves toward price by an acceleration factor, and the factor increases every time the trend makes a new extreme — 0.02 to start, another 0.02 each time, capped at 0.2.
The acceleration
Measured on this trend: the step between dots grew from 0.028 to 0.095 — more than three times, across one move.
That is the idea and it is a good one. Early in a trend the stop stays loose because the move has not proved itself; the longer it runs, the tighter it gets, so you give back less of a big move than of a small one.
It also means the indicator catches up whether or not price turns. A trend that stalls does not need to reverse for the dot to reach it — the dot is still closing in while price stands still.
The flip
When price touches the dot, it jumps to the other side of price and the trend is treated as reversed. There is no neutral state — it is always saying up or down.
In a trend it does the job well, and the tightening is visible: the dots start well below price and end up nearly touching it.
Against Supertrend
The two tools do the same job and trade off differently, which is easier to see side by side than to describe.
Parabolic SAR exited 1 bar after the actual high on this chart. Supertrend took 4.
And Parabolic SAR flipped 4 times in a 36-bar trend. Supertrend flipped once in 42.
That is the trade, and it is the same trade every trailing stop makes. Faster exits cost you more false exits, and there is no arrangement of the arithmetic that gives you one without the other. Which you want depends on whether being late or being wrong costs you more, and that is a question about your account rather than about the indicator.
The settings
Two numbers: the starting step and the maximum. Doubling the step from 0.02 to 0.04 took the flips from 4 to 8 on identical bars.
Doubling the setting doubled the trades and added nothing. That is the clearest version of a point this site keeps making — a knob that changes how often something happens is not a knob that changes how much you know.
0.02 and 0.2 are Wilder’s originals from 1978 and worth keeping for the crowding reason on the support and resistance page.
A worked example
You are already long from your own read. The dots are not the entry.
Dots below price, tightening. Nothing to do. This is the whole middle of a trend.
The gap between dot and price narrows as the move extends. Your stop is being managed for you, and it is being managed the way you would do it by hand.
Price touches the dot. Out — and this is where you decline half the indicator. Take the stop, skip the reverse. The dot flipping is not evidence of a downtrend; it is evidence that an uptrend stopped, which is the same distinction as the trend line break on the trend lines page.
The original data
Across our study of 24,971 trading videos, 63 cover the Parabolic SAR. The median one gets 6,843 views, 78% never pass 50,000, and the median length is 8.8 minutes.
63 videos is one of the smallest fields measured for this glossary — against 592 for Fibonacci and 498 for chart patterns, a field roughly a tenth the size.
The corpus carries description text for 60 of those 63, and across those 60, one mentions invalidation, failure, or what a bad read looks like.
When it fails
Sideways it is unusable
Eight flips in 35 bars, and if you followed the reverse instruction, that is eight trades in a market that finished where it started.
The acceleration is what does it. In a trend, tightening is a feature; in a range, the dot closes in on price until it is touched by ordinary noise, then flips and starts closing in from the other side. Being reached is not a failure mode, it is the design — and in a range it happens for no reason at all.
Always-in is a strong assumption
The tool has no “no position” state. Real markets spend a great deal of time in no condition at all, and an indicator that cannot say so will hand you a direction anyway.
It has no idea how volatile the market is
Worth putting next to the comparison above. Supertrend sets its distance from average true range (ATR), so its band widens when bars get bigger. Parabolic SAR has no volatility term anywhere in it — the step is 0.02 whether the market is dead or wild.
So it does not self-normalise the way Supertrend does, and that is a large part of why it flips so much more in the choppy scene above.
It only knows extremes
The calculation uses the highest high of the current trend and nothing else about the bars. A violent day and a quiet drift to the same high produce the same dot — everything about how price got there is discarded.
You read the trail after the trend finished
A completed trend makes the dots look like a plan. At the pause above they are still below price and tightening, which is exactly what they do before a continuation and before a top.
Related
Supertrend is the direct comparison — same job, different arithmetic, and the numbers above show what each one buys.
Stop loss is what this actually is, and where a stop belongs when you place one yourself.
And trading range is the condition that breaks it, which you have to recognise from price rather than from the dots.
I treat this as a trailing stop and nothing else, which means I take the exit and ignore the reverse half of the name. The acceleration is genuinely clever - the longer a move runs the tighter it gets, which is roughly how I would manage a position by hand anyway. What I would never do is leave it running in a quiet market, because it is the most reliable way I know to take eight losing trades in a row without anything actually happening.
— Michael Whitman, from this video
This page is educational, not financial advice. Test every idea on your own charts before risking money.