What Is the Parabolic SAR?

Key Takeaways: Harnessing The Absolute Strength Rating

The Parabolic SAR (Stop and Reverse), built by J. Welles Wilder Jr., isn’t trying to be subtle. It’s a binary signal machine—dots go below the price, trend’s up. Dots go above, trend’s down. Simple, visual, and endlessly triggering.

Its job? To tell you where the trend is and when it might be changing. On a clean trend, it’s a scalpel. On a sideways mess, it’s a butter knife at a gunfight.

How It Works

This thing doesn’t whisper. It plots dots.

• Dots below price = Bullish. Trend’s up.
• Dots above price = Bearish. Trend’s down.
• Dots flip = Potential reversal.

As price moves, the SAR dots follow—starting slow, then accelerating with the trend. That’s the parabolic part.

If you’re long and the dots flip above the candle, that’s your get-out signal. If you’re short and they flip below—time to cover.

The Math Behind It (Briefly)

SAR is calculated based on:

• EP (Extreme Point): The highest high (in an uptrend) or lowest low (in a downtrend).
• AF (Acceleration Factor): Starts at 0.02, increases with new highs/lows, maxing at 0.20.

Formula:

• Uptrend:
  SAR = Prior SAR + AF × (EP - Prior SAR)
• Downtrend:
  SAR = Prior SAR - AF × (Prior SAR - EP)

Manual calculation? Rare. Understanding the logic? Useful.

When It Works (And When It Definitely Doesn’t)

Strong Trends = Green Light

In a trending market, the SAR is your trend-hugging sidekick. You’ll stay in the move longer and get out before the give-back.

To better understand what defines a strong trend, check out this breakdown of the Stan Weinstein Stage Analysis.

Choppy Markets = Whiplash

SAR has no off switch. It’s always on. Which means in sideways conditions, it becomes a signal machine gun—with half the accuracy.

If the price chops around, expect false signals, whipsaws, and death by a thousand stop-outs.

How to Use the Parabolic SAR Smarter

1. Stick with the Trend

Only take buy signals in uptrends. Only short in downtrends. Ignore countertrend signals. Think of SAR as an entry tool in the direction of the trend, not a trend detector.

2. Use a Long-Term Moving Average Filter

Example:

• Price above 200-day MA? Take long entries only.
• Price below 200-day MA? Stick with shorts.

This filters out a lot of junk. For more on how trend strength can be combined with filters, see how to find winning stocks with relative strength.

3. Set Stop-Losses with SAR

Even if you’re not entering based on SAR, use it for trailing stops. It’s dynamic and adapts as the trend matures.

• In a long? Move your stop up with the SAR dot.
• In a short? Trail your stop down as the dots fall.

4. Combine with Momentum Indicators

SAR doesn’t tell you how strong a trend is. It just says “yes” or “no.”

Pair it with:

• ADX: Measures trend strength.
• Stochastic: Overbought/oversold zones.
• Volume: Confirmation.

More data = better entries.

Real Talk: Pros and Cons

Pros

• Visual and simple: Even your sleep-deprived brain can spot the dots.
• Good in trends: It rides momentum nicely.
• Decent stop-loss tool: Automatically tightens risk.

Cons

• Whipsaws in ranges: Death by dots.
• Always signaling: Even when it shouldn’t.
• Not great solo: Needs a buddy system.

Final Thoughts

Parabolic SAR is a blunt but useful tool. Use it when markets are trending. Pair it with moving averages and trend strength tools to reduce false signals. And never trust it alone in a range.