Parabolic SAR

What is Parabolic SAR?

Parabolic SAR is J. Welles Wilder’s trend-following stop-and-reverse indicator, plotted as dots below a rising price and above a falling price. It maintains an up or down state and calculates a price threshold for the next bar, which trails price and speeds up as the trend makes new extremes. When price reaches the threshold, the state reverses and the dots move to the other side.

The chart shows a dot for each completed period. At a reversal, the new dot belongs to the opposite state. Distinguish that new dot from the threshold that triggered the switch.

How is Parabolic SAR calculated?

The provisional update is prior SAR + AF × (EP − prior SAR). EP is the highest high of the current up state or the lowest low of the current down state.

AF starts at 0.02 in this example, increases by 0.02 on a new trend extreme and stops increasing at 0.20. It determines the fraction of the EP-to-SAR gap covered by the provisional update.

The gap and the range clamp also affect the result. An unchanged AF with a shrinking gap produces smaller successive increments, so the dot’s step size does not have to increase every bar.

Parabolic SAR reversal and range clamp rules

First evaluate the current range against the carried threshold. If the up-state low reaches or falls below that threshold, switch down. If the down-state high reaches or exceeds it, switch up.

On a reversal, start the opposite dot from the prior trend extreme, adjust it to the relevant current and previous range boundary, reset AF and set the new state’s extreme point.

After processing the completed bar, calculate the next threshold. Cap a long candidate at the lows of the two most recent completed bars. Floor a short candidate at their highs.

Set the starting state and threshold before the first bar; every later dot builds from them.

Parabolic SAR example

With SAR $48, EP $52 and AF 0.04, the provisional update is $48.16. After a new extreme of $53 raises AF to 0.06, the next candidate is $48.45. The recent lows sit above both candidates, so the clamp leaves them unchanged.

In the separate chart, the seventh dot is $103.74. The next provisional value is reduced to $104 by the recent-low clamp. Bar 8 reaches a low of $101, triggering the reversal. The new short-state dot is $114.

How traders use Parabolic SAR: reversal, trailing stop or filter

A stop-and-reverse strategy acts in both directions. An exit-only strategy closes its current position at the specified event. A directional filter uses the state to qualify another entry setup.

Choose the trigger, execution instruction, size and exit before applying the rule. For an options position, define whether the underlying’s SAR event controls the trade. When the dots flip, Options Flow shows whether ask-side calls or puts are backing the new direction, and the Options Profit Calculator prices each structure at the target and at the SAR stop.

Limitations of Parabolic SAR

• Switch to exit-only or filter use in a sideways market. The indicator always holds an up or down state, so in a range it flips back and forth and each reversal can fail quickly.
• The acceleration settings drive every dot. A higher starting AF or cap pulls the threshold toward price faster, so reversals come sooner. Wilder’s defaults are 0.02, 0.02 and 0.20; check which settings a chart uses before comparing it with another.
• Match the initial state, range clamp and trigger rule before comparing two charts: each one moves the dots on the same bars.
• A touch triggers the reversal, and a gap through the threshold fills at the next available price instead of at the dot, so size the stop for the gap.

Bottom line

Parabolic SAR gives a trend state and a trailing stop that speeds up as the trend extends. Fix the acceleration settings, initial state and trigger rule, decide whether a reversal only exits or also opens the opposite trade, and use it as a filter or exit-only stop when price moves sideways.