Parabolic SAR

A trailing-stop and trend-direction tool that plots dots above or below price.

What it is

Parabolic SAR (Stop and Reverse), developed by J. Welles Wilder Jr., is a trend-following indicator that plots a series of dots either above or below price on the chart. The dots track the prevailing direction: when they sit below price, the indicator is in an "uptrend" state; when they sit above price, it is in a "downtrend" state. "SAR" stands for "stop and reverse" because the indicator is designed to flip sides — and trend assumption — once price crosses it. It is most often described as a way to visualize trend direction and to help define a trailing stop level, rather than as a stand-alone entry system. As with every indicator, it is descriptive of past and current price, not predictive, and all trading carries risk of loss.

How it works

The SAR value moves a little closer to price on each bar. How fast it moves is controlled by an "acceleration factor" (AF). The AF starts small (commonly 0.02) and increases by a step (commonly 0.02) each time price makes a new extreme point in the current trend — the highest high in an uptrend or the lowest low in a downtrend — up to a maximum cap (commonly 0.20). Each new SAR is calculated by taking the prior SAR and moving it toward that extreme point in proportion to the AF, so a larger AF pulls the dots toward price faster. Because the AF grows as a trend extends, the dots accelerate toward price the longer the move runs, which is what produces the curved, "parabolic" shape. When price touches or crosses the SAR, the indicator flips to the other side, resets the AF, and begins trailing in the new direction. The closer the dots get to price, the tighter the implied trailing stop. Note that the standard inputs are a step and a maximum (e.g. 0.02 and 0.20), not a lookback "length."

How traders read it

• Dots below price are commonly read as a sign the current trend state is up; dots above price as the current trend state is down.
• A flip of the dots from one side of price to the other is often interpreted as a possible change in trend direction, not a guaranteed reversal.
• The SAR level is frequently used as a reference for a trailing stop — some traders treat a close beyond the dots as the point where their trend assumption no longer holds.
• Tightly spaced, accelerating dots are often read as a strong, extended move; widely spaced dots near the start reflect the smaller early acceleration factor.
• Because SAR always sits on one side of price, many traders pair it with a separate trend filter to judge whether a trend actually exists. None of these readings is predictive, and all trading carries risk of loss.

Common settings

Default acceleration step 0.02, increment 0.02, maximum 0.20 (Wilder's original values). Some traders lower the step/maximum for smoother, less twitchy behavior or raise them for a more responsive trail. Settings are a matter of preference and context, not a recommendation.

Strengths

• Gives a clear, visual read of the current trend state and direction at a glance.
• Offers a systematic, rule-based reference level that some traders use for a trailing stop, which tightens as a trend matures.
• Simple to interpret with only two inputs (step and maximum) and no ambiguity about which side of price it is on.
• Often used alongside trend filters, since it is designed to follow direction rather than to identify ranges.

Pitfalls to watch

• It tends to perform poorly in sideways or choppy markets, where it can flip back and forth repeatedly and produce frequent whipsaws.
• SAR is a lagging, reactive tool — it follows price and cannot anticipate turns, so flips often occur after a move is already underway.
• Because it always plots on one side of price, it can imply a trend even when the market is range-bound; it does not measure trend strength on its own.
• The default 0.02 / 0.20 settings are conventions, not universal; behavior changes meaningfully with the step and maximum, and over-tuning to past data can be misleading.
• Treating each flip as an automatic entry or exit can lead to over-trading; SAR is educational context, not advice to act, and no indicator predicts price.

Pine v6 example

//@version=6
indicator("Parabolic SAR", overlay = true)

start = input.float(0.02, "Start (AF)")
inc   = input.float(0.02, "Increment")
maxAF = input.float(0.20, "Maximum")

sar = ta.sar(start, inc, maxAF)

plot(sar, "SAR", color = color.orange, style = plot.style_cross)

Pro tip: SAR is designed to follow trends, not to identify ranges. Many traders only lean on it when a separate filter (such as a moving average or a trend-strength reading) already suggests a market is trending, and they tend to disregard its flips during choppy, sideways conditions where whipsaws cluster. Remember it is educational context only — no indicator predicts price, and all trading carries risk of loss.

Educational only — not financial advice, not a recommendation to trade. No indicator is predictive; trading involves substantial risk of loss.