Parabolic SAR
Plots dots that trail below price in an uptrend and above it in a downtrend, accelerating toward price over time. A flip in dot position signals a possible reversal — SAR stands for “stop and reverse,” and traders often use it to trail stop-losses.
What the numbers mean
The step is the acceleration factor: each time price makes a new extreme in the trend's direction, the dots move toward price by another 0.02, up to a ceiling of 0.20. A larger step tightens the trail and flips sooner; a smaller one gives the trend more room.
- 0.02 step — the acceleration added each time the trend makes a new extreme
- 0.20 maximum — the ceiling on that acceleration, reached after nine new extremes
- 0.01 step — a looser trail that gives trends more room and flips less often
- 0.03 or higher — a tighter trail for fast intraday moves, at the cost of frequent flips
How it is used
Mainly a trailing stop and a direction flag — hold while the dots stay below price in an uptrend, treat the flip to the other side as the exit. Some traders use the flip itself as a reversal entry.
- Dots below price → uptrend intact; dots above → downtrend intact
- The flip from one side to the other → exit, and for some traders the reversal entry
- The dot itself is a price level, so it doubles as the stop-loss to place
How it relates to everything else
SAR assumes a trend always exists, which makes it a natural partner for an indicator that says whether one does. The conventional pairing is ADX above 25 as the permission to take SAR flips at all; used alone in a range it flips every few bars and bleeds.
- SAR + ADX > 25 → only act on flips while a trend is actually in place
- SAR + 50 or 200 SMA → take only the flips that agree with the bigger trend
- Supertrend does the same job using ATR, and flips less often
What to watch for
It assumes the market is always trending. In a sideways market the dots flip back and forth every few bars, which is why it is normally filtered by ADX or used only after a trend is established.