Parabolic SAR (parabolic stop and reverse) is one of the most popular trend-following indicators. Its appeal is that it not only helps in identifying the prevailing trend, but also when the trend ‘stops and reverses’.

Parabolic SAR was developed by J. Welles Wilder Jr., and when plotted on a chart, it prints parabolas (dots) that track the price action accordingly. A bullish parabola will be printed below the price when it is trending upwards, whereas a bearish parabola is printed above the price when it is trending downwards.

A bullish parabola will stop and reverse when the trend turns lower, and vice versa. The parabolas or dots that are below the price, always rise. In comparison, the parabolas above the price will always fall.

As a result, these dots track the price of an asset and they are able to pinpoint price reversals when they occur. This makes Parabolic SAR one of the best indicators that can help capture optimal entry and exit points in a trending market.

Parabolic SAR belongs to the broader group of trend-following technical analysis indicators. Other common indicators in this group include Moving Averages and Ichimoku Kinko Hyo. As a trend following indicator, Parabolic SAR is usually prone to giving out false signals in ranging or sideways markets.

Calculation of Parabolic SAR

The computation of Parabolic SAR is done in such a manner that it will ensure the parabolas (dots) are as close as possible to the price action. This ensures that traders are able to confirm existing trends or easily spot a reversal.

Parabolic SAR (PSAR) is calculated using the formula below:

Uptrend: PSAR = Previous PSAR + AF (EP – Previous PSAR)
Downtrend: PSAR = Previous PSAR – AF (Previous PSAR – EP)

Where:

  • EP is Extreme Price. In an uptrend, EP is the highest high. In a downtrend, EP is the lowest low.
  • AF is an Acceleration Factor. The default AF is usually 0.02, with most platforms allowing an AF value of up to 0.20.

The formula above ensures that a parabola will be printed below the price in a rising market; and above the price in a falling market. If the price falls below the rising parabolas, the parabolas will jump on top of the price. Likewise, if the price rises above the falling parabolas, the parabolas will drop below the price. Logically, the bigger the Acceleration Factor, the faster the parabolas will converge with the price.

Reading Parabolic SAR

Reading Parabolic SAR is simple and straightforward. When the parabolas (dots) are below price candlesticks, it denotes a bull market and traders should seek opportunities to place buy orders; whereas when the parabolas are above price candlesticks, it implies a bear market and traders should seek opportunities to place short sale orders. As a rule of thumb, a trend reversal can be confirmed when three consecutive parabolas form on the opposite side. For instance, during an uptrend, a trend reversal would be confirmed after three consecutive parabolas print on top of the price action.

Sample Trade Setups Using the Parabolic SAR

The Parabolic SAR (Stop and Reverse) indicator excels in identifying trend direction and potential reversal points.

Traders often use SAR dot positioning in combination with price action to make entry and exit decisions.

Below are a few classic trade setups that demonstrate how the Parabolic SAR can be used in real-world scenarios:

1. Trend Reversal Entry

  • Setup: Wait for a clear trend direction change—price crosses above the Parabolic SAR dots after a downtrend.
  • Buy Signal: A bullish candlestick closes above the SAR dots, which now appear below the price.
  • Example: If EUR/USD has been in a downtrend and a bullish candle forms above the SAR dots that just flipped below the price, this signals a potential long entry.

2. Trailing Stop for Trend Following

  • Setup: Enter the trade based on a different strategy (e.g., moving average crossover), then use the Parabolic SAR dots as a dynamic trailing stop.
  • Example: In an uptrend on Gold, the dots below the price act as a guide to move your stop-loss upward as the trend progresses.

3. Exit on Opposite SAR Signal

  • Setup: Exit when the SAR flips sides.
  • Example: You enter a long trade when the SAR flips below the candle. Once SAR flips above the price, it suggests the uptrend may be ending—consider taking profit or tightening stops.

4. SAR with Support/Resistance

  • Setup: Look for SAR reversal signals near key support/resistance levels to increase accuracy.
  • Example: If Bitcoin approaches a known support zone and the SAR flips below the price, it adds confirmation to a long trade.

Tips for Setup Success:

  • Avoid SAR signals during sideways markets—wait for momentum confirmation.
  • Combine with volume or trend confirmation tools for added conviction.

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Advanced Strategy: Using Parabolic SAR with ADX or EMA

While the Parabolic SAR is a powerful standalone tool, its true potential is unlocked when combined with complementary indicators that confirm trend strength or momentum.

Two popular pairings are the Average Directional Index (ADX) and Exponential Moving Average (EMA).

1. Parabolic SAR + ADX (Average Directional Index)

The ADX measures the strength of a trend. Values above 25 typically indicate a strong trend, while values below 20 suggest a range-bound market.

  • Setup:
    • Buy when SAR dots flip below the price and ADX > 25.
    • Sell when SAR flips above the price and ADX > 25.
  • Why it works: ADX helps filter out weak or false SAR signals during low-volatility or sideways markets. This combo improves accuracy by confirming whether a new SAR signal aligns with a strong trend.
  • Example: In GBP/JPY, SAR flips below the price. ADX reading is 30—this signals strength behind the bullish move, increasing confidence in a long position.

2. Parabolic SAR + EMA Crossover

EMAs help smooth price data and define trend direction. A common setup involves the 50-period EMA and 20-period EMA.

  • Setup:
    • Buy when:
      • 20 EMA crosses above 50 EMA (bullish crossover), and
      • SAR dots flip below the price.
    • Sell when:
      • 20 EMA crosses below 50 EMA (bearish crossover), and
      • SAR flips above the price.
    • Why it works: The EMA crossover confirms the trend shift, while SAR provides a timely entry and stop-loss management.
    • Example: In the NASDAQ 100, a bullish EMA crossover occurs, and the next candle sees SAR flip below the price. Enter long with SAR dots acting as your trailing stop.

Bonus Tip:

In volatile markets, consider adjusting the acceleration factor of the SAR to reduce whipsaws—more on this in the next section.

Default vs Custom Parabolic SAR Settings: When and Why to Adjust

The Parabolic SAR indicator uses a built-in formula with two adjustable parameters: the acceleration factor (AF) and the maximum acceleration. By default, these are set to:

  • AF = 0.02
  • Max AF = 0.20

These defaults are widely used and suitable for most trending markets, but they can be fine-tuned to suit different trading styles, timeframes, or market conditions.

1. Default Settings: Balanced for Most Traders

  • Pros: Offers a good balance between early signal detection and noise filtering.
  • Use case: Ideal for swing traders or position traders using daily or 4-hour charts.
  • Behaviour: The SAR reacts gradually to price movements and provides enough buffer against false signals in moderate-trending markets.

2. Custom SAR Settings: Tailored Precision

  1. Faster SAR (e.g., AF = 0.04, Max AF = 0.30)
  • Purpose: More responsive to price changes.
  • Best for: Scalping or short-term intraday trading.
  • Risk: Increased risk of false signals during consolidation.
  1. Slower SAR (e.g., AF = 0.01, Max AF = 0.15)
  • Purpose: Filters out more noise and reduces signal frequency.
  • Best for: Long-term trend followers.
  • Benefit: Fewer signals, but with higher reliability during strong trends.

3. How to Choose the Right Settings

  • Volatile markets (e.g., crypto): Consider slower settings to reduce whipsaws.
  • Steady trends (e.g., gold or indices): Default or slightly faster settings may work well.
  • Backtesting tip: Test SAR performance with your chosen settings across historical charts before using them in live trading.

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When Not to Use the Parabolic SAR

While the Parabolic SAR is highly effective in trending markets, its performance deteriorates significantly during range-bound or sideways conditions. Misapplying the indicator in the wrong context can lead to false signals and unnecessary losses.

1. Sideways or Choppy Markets

  • Problem: In non-trending environments, SAR frequently flips back and forth, producing unreliable entries and exits.
  • Outcome: Traders may be whipsawed in and out of positions, especially on lower timeframes.

Example: In a flat EUR/USD range between support at 1.0800 and resistance at 1.0850, SAR dots alternate rapidly above and below price—triggering false signals.

2. Low Volatility Periods

  • Problem: SAR is momentum-based; without a strong directional move, its signals lack follow-through.
  • Tip: Avoid using SAR during Asian trading hours or around major holidays when volume and volatility are typically lower.

3. Near News Releases

  • Problem: Spikes caused by economic events (e.g., Non-Farm Payrolls, central bank decisions) can trigger SAR flips not backed by sustained trend shifts.
  • Tip: Wait until the market digests the news before re-engaging with SAR signals.

4. How to Detect When Not to Use SAR

  • Use the ADX indicator to determine trend strength:
    • ADX < 20: Avoid SAR—market lacks momentum.
    • ADX > 25: SAR may work well—trend is established.
  • Alternatively, identify horizontal price zones with support/resistance before applying SAR to confirm trending conditions.

Asset Class Considerations: Where the Parabolic SAR Works Best

The effectiveness of the Parabolic SAR varies depending on the asset class, as different markets exhibit unique characteristics in terms of trend behaviour, volatility, and liquidity. Understanding these nuances helps traders decide where SAR-based strategies are most reliable.

1. Forex (Foreign Exchange)

  • Strength: Ideal for trending currency pairs like GBP/JPY, EUR/USD, or USD/CHF.
  • Why it works: Forex markets often display clear directional moves, especially around major sessions (London/New York overlap).
  • Watch out: Avoid using SAR during range-heavy periods or on pairs prone to prolonged consolidation (e.g., EUR/CHF).

2. Commodities (Gold, Oil, Silver)

  • Strength: Highly effective during momentum-driven cycles (e.g., strong uptrends in gold during inflationary fears).
  • Why it works: Commodity prices often trend due to macroeconomic forces or supply-demand shifts.
  • Pro tip: Combine SAR with fundamental awareness—oil prices might trend sharply after inventory reports, creating great SAR opportunities.

3. Indices (S&P 500, FTSE 100, NASDAQ 100)

  • Strength: Reliable in trending phases, especially during earnings seasons or monetary policy cycles.
  • Caution: Indices can stall or range during uncertainty—monitor for news catalysts and combine SAR with volume or volatility filters.

4. Cryptocurrencies (Bitcoin, Ethereum, etc.)

  • Strength: Strong trending potential makes SAR appealing.
  • Challenge: High volatility and erratic price swings increase the chance of false signals.
  • Adjustment tip: Consider slower SAR settings to reduce whipsaws and combine with a volatility gauge like Bollinger Bands.

5. Stocks (Individual Equities)

  • Strength: Works well on momentum stocks or post-earnings breakouts.
  • Limitation: Gaps in price (common with stocks) can disrupt SAR signal reliability.
  • Best use: Apply SAR during intraday trading or post-gap trend continuation setups.

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Interpreting Parabolic SAR with Market Volatility

Market volatility plays a key role in the reliability of Parabolic SAR signals. Because SAR reacts to price momentum, its effectiveness varies across high- and low-volatility conditions.

Quick Guidelines:

  • High Volatility (e.g., during news events or crypto surges):
    • Risk: SAR may flip too frequently, creating false signals.
    • Fix: Reduce sensitivity—use a lower acceleration factor (e.g., AF = 0.01).
  • Low Volatility (e.g., range-bound periods):
    • Risk: SAR may lag or give no clear direction.
    • Fix: Either avoid SAR or pair it with volatility indicators like Bollinger Bands or ATR.
  • Volatility Check Tip: Use ATR (Average True Range) to gauge if the current environment justifies SAR usage or setting adjustments.

Trading on Parabolic SAR with AvaTrade

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Main Parabolic SAR Indicator FAQ

  • What is the Parabolic SAR Indicator?
    The Parabolic Stop and Reverse Indicator, better known as the Parabolic SAR Indicator, is an indicator that is used to forecast the short term momentum of an asset. The reason it is often used is not to determine when to enter a trade, but rather for where to place a stop loss to protect against a sudden shift in the market. One of the unique features of this indicator is that it assumes the trader is always fully invested in the market, either long or short. That makes it particularly useful for use in trading systems that never exit the market, but only switch between long and short positions

  • How is the Parabolic SAR Indicator used in trading?
    The Parabolic SAR is best used in steadily trending markets. If the market is choppy or range-bound the trader will find himself whipsawed in and out of trades when using this indicator. This type of whipsaw can be avoided by adding a confirming indicator to the study of the market. J. Wells Wilder, the creator of the parabolic SAR, recommended also using the ADX to get a more accurate read on the strength of any trend. In a trending market solid trades with long-term profits are more likely.

  • What is the best Parabolic SAR trading strategy?
    The use of other indicators alongside the Parabolic SAR is necessary to avoid whipsaws and many failed trades. One of the best strategies is to use the Parabolic SAR in combination with two moving averages. These moving averages are there to verify that a trend reversal is actually taking place when signaled by the Parabolic SAR. Typically a 40-period moving average and a faster moving 20-period moving average are used. A trade signal is only generated if the Parabolic SAR signals a trend reversal and the moving averages cross to indicate the same change in trend.

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** Disclaimer – While due research has been undertaken to compile the above content, it remains an informational and educational piece only. None of the content provided constitutes any form of investment advice.