Parabolic SAR (Stop and Reverse) is a trend-following indicator that plots dots above or below price candles, acting as both a trailing stop and a reversal signal.
How It Works
Parabolic SAR places dots (the SAR level) based on the current trend and the highest (or lowest) point price has reached.
In an uptrend: Dots appear below price. The SAR level rises as price makes higher highs. If price falls and closes below the SAR, the trend reverses and SAR flips above price.
In a downtrend: Dots appear above price. The SAR level falls as price makes lower lows. If price rises and closes above the SAR, the trend reverses and SAR flips below price.
Example: EUR/USD uptrend. SAR dots appear at 1.0950, 1.0965, 1.0980 (rising as price makes higher highs). Price pulls back to 1.0960 but doesn’t close below SAR 1.0980. Uptrend intact. Price then falls to 1.0955 and closes below 1.0980 SAR. Reversal signal. SAR flips above price.
SAR as a Trailing Stop
Parabolic SAR functions as an automatic, trailing stop-loss. As price rises, the SAR rises, protecting your profit. If price reverses, you exit at the SAR.
This removes emotion. You don’t decide when to stop out—the SAR does.
Example trade:
- Buy EUR/USD at 1.1000. SAR initially at 1.0950.
- Price rallies to 1.1100. SAR rises to 1.1020 (trailing).
- Price rallies to 1.1150. SAR rises to 1.1080 (still trailing).
- Price falls to 1.1070, closing below SAR 1.1080. Exit signal. You’re stopped at 1.1080 = +80 pips profit.
The SAR trailed your stop higher automatically.
Reversal Signals
When the SAR flips from below to above (or above to below) price, it signals trend reversal.
| Signal | Meaning | Action |
|---|---|---|
| SAR flips from below to above | Uptrend ends, downtrend begins | Exit long, consider short |
| SAR flips from above to below | Downtrend ends, uptrend begins | Exit short, consider long |
These reversals often occur right at support/resistance or moving averages, making them stronger.
The Challenge: Whipsaws
Parabolic SAR produces false signals in choppy, ranging markets. In a 100-pip range, the SAR might reverse 5 times, stopping you out repeatedly on tiny moves.
Example: GBP/USD ranges 1.2600–1.2700 for a week.
- SAR gives buy signal at 1.2610 (reversal)
- Stops you at 1.2590 with -20 pip loss
- Then SAR gives sell signal at 1.2695
- Stops you at 1.2720 with -25 pip loss
- Repeat all week = slow bleed
This is why combining SAR with trend filters is essential. Only trade SAR signals when ADX > 25 (strong trend), not when ADX < 20 (chop).
Parabolic SAR Strength Parameters
SAR includes two adjustable parameters:
- Initial AF (Acceleration Factor): Starts at 0.02. Controls how fast the SAR accelerates.
- Max AF: Caps the SAR acceleration at 0.20.
Lower AF = slower SAR acceleration = more conservative. Higher AF = faster SAR acceleration = more aggressive.
Default 0.02/0.20 works for most forex traders. Don’t change these without testing.
Real Example
AUD/USD daily chart:
- Week 1: Price rallies from 0.6500 to 0.6650. SAR dots rise from 0.6480 to 0.6580. Strong uptrend.
- Week 2: Price pulls to 0.6600 but stays above SAR 0.6580. Uptrend intact.
- Week 3: Price falls to 0.6570 and closes below SAR 0.6580. Reversal signal. SAR flips above price at 0.6575.
- Week 4: Price continues down to 0.6450. SAR falls to 0.6520, 0.6490 (trailing downtrend).
The SAR caught the reversal and then trailed the downtrend. Clear signal.
Using SAR with Moving Averages
Parabolic SAR works best combined with moving averages:
- Buy signal: SAR flips below price + price is above 50-day MA. Stronger than SAR alone.
- Sell signal: SAR flips above price + price is below 50-day MA. Stronger than SAR alone.
This filters out whipsaws where SAR reverses but the trend is still intact.
Limitations
SAR is a lagging indicator. By the time the SAR flips, a chunk of the reversal has already occurred. You’re often stopped out at the worst level, not the actual top.
Additionally, SAR doesn’t work in ranging markets. It’s designed for trends. Pair it with ADX filtering to avoid choppy periods.
PipJournal tracks every Parabolic SAR signal you take, showing whether your entry on SAR reversals actually beats random entries, and more importantly, whether your SAR stop-losses are appropriately protective or too close. Over time, you’ll see which SAR parameter settings generate the highest win rate.
