Parabolic SAR
Parabolic SAR — short for Stop and Reverse — is a trend-following indicator developed by J. Welles Wilder. It plots dots above or below the price that act as a trailing stop. When the dots flip side, the indicator signals a potential trend reversal. SAR is popular among Indian swing traders for managing trailing stops in strong moves.
Key takeaways:
- SAR plots dots that follow price, acting as a trailing stop-loss.
- When dots are below price, the trend is up; when above, the trend is down.
- A flip in dot position is the reversal signal.
- Works best in trending markets; produces whipsaws in choppy markets.
- Default parameters: Step 0.02, Maximum 0.2 — Wilder’s original values.
How SAR works
SAR uses an Acceleration Factor (AF) that increases each time price makes a new extreme in the trend, making the stop tighter as the trend extends. When the price crosses the SAR dot, the indicator “stops and reverses” — flipping the direction and starting a new dot sequence.
Reading SAR on a chart
- Dots below price: Uptrend in progress; long bias; SAR serves as trailing stop.
- Dots above price: Downtrend in progress; short bias.
- Dot flip: Reversal candidate — exit existing position, consider opposite trade.
- Increasing distance between dot and price: Strong move; trend accelerating.
Worked example
Bank Nifty enters a strong uptrend at 47,500. SAR dots start just below price. As the index rallies to 48,500, the dots accelerate towards price, tightening the stop. A break of the SAR dot at, say, 48,250, flips the indicator and signals an exit (or a potential short trade). Trailing stops via SAR can lock in significant profit on strong moves.
Strengths and weaknesses
| Strengths | Weaknesses |
|---|---|
| Clear visual signals | Frequent whipsaws in ranges |
| Built-in trailing stop logic | Lags in early stages of new trends |
| Works on any time frame | Requires trend filter for best results |
How to filter false signals
- Use ADX > 25 as a precondition; SAR signals in choppy markets are unreliable.
- Combine with a moving average to confirm trend direction.
- Avoid SAR on small-caps with thin liquidity.
- Use it as a trailing stop rather than an entry signal in many setups.
Adjusting parameters
Default settings (Step 0.02, Max 0.2) are fine for daily charts. Intraday traders sometimes lower the step to 0.01 for smoother dots, or raise the max to 0.3 to tighten stops faster. Tweaks should be tested on the specific instrument and time frame.
Frequently asked questions
Is Parabolic SAR good for intraday trading?
Yes on liquid indices and large-caps. Pair with VWAP or ADX to filter range-bound noise.
Can SAR be used as the only stop-loss?
Some traders do, but a wider time stop or chart-based stop is wise to avoid getting whipped out by short pullbacks.
Does SAR predict reversals or follow them?
It follows price closely but reacts before classical lagging indicators. The flip is essentially a trailing-stop event.
Is SAR a leading indicator?
No. SAR is reactive — it adjusts to recent price action. It is best for trade management, not prediction.
