Parabolic sar
Family VI · Charts & indicators
Not to be confused with trend line, moving average, ichimoku cloud.
Parabolic SAR is a technical indicator, usually drawn as a sequence of dots above or below the price bars, that represents a trailing stop level which accelerates as a trend persists. The letters SAR stand for stop and reverse: the dot moves closer to price at an increasing rate, and when price crosses it, the indicator flips to the other side of the chart and a new trend is assumed. It is an overlay, not a separate pane, and it is calculated from price and time rather than from volume or fundamentals.
Calculation
The indicator is defined by two inputs: the step, also called the acceleration factor, and the maximum step. A typical starting step is 0.02, and a common maximum is 0.20, though values vary by platform and user preference.
- Initial SAR: the first dot is placed at the prior extreme point, the lowest low of the recent downtrend or the highest high of the recent uptrend.
- Acceleration: each time price makes a new extreme in the trend direction, the acceleration factor increases by the step, up to the maximum.
- Next SAR: the next dot is the prior SAR plus the acceleration factor multiplied by the prior extreme point minus the prior SAR.
- Reversal: if price crosses the SAR, the indicator flips to the opposite side, the extreme point resets to the current bar's extreme, and the acceleration factor resets to the step.
Because the acceleration factor grows with each new extreme, the dots speed up and eventually catch price, which is the source of the parabolic shape.
Worked example
Assume an uptrend with an initial SAR of 100.00, a prior extreme high of 110.00, a step of 0.02, and a maximum of 0.20. Each new high raises the acceleration factor by 0.02.
The SAR rises from 100.20 to 103.01 over four bars, moving closer to price as the acceleration factor increases. A close below the current SAR would flip the indicator to a downtrend.
Interpretation and limitations
In an established trend, the SAR dots act as a visual trailing stop: longs hold while price stays above the dots, shorts hold while price stays below. A flip signals that the prior trend is considered over and the opposite trend has begun.
The indicator performs poorly in sideways markets, where frequent flips produce repeated whipsaw signals. It also lags at trend reversals because the acceleration factor must build before the dots reach price. Traders often combine it with trend filters or use it only after a trend is confirmed by other methods.
Often confused with
- trend line
- A trend line is a straight line drawn on a price chart connecting two or more successive lows in an uptrend or successive highs in a downtrend, used to visualise the direction and slope of a price movement.
- moving average
- A moving average is a continuously recalculated line that plots the arithmetic mean of a price series over a fixed number of the most recent periods, dropping the oldest value as each new one is added.
- ichimoku cloud
- The Ichimoku Cloud is a charting system that plots five lines—tenkan-sen, kijun-sen, senkou span A, senkou span B, and chikou span—to depict support, resistance, and momentum in one view.
See also
- forex technical analysis indicators
- price action
- fundamental analysis
- support and resistance
- technical analysis
- fibonacci