What It Is
Parabolic SAR (Stop And Reverse) places dots above or below price to indicate trend direction and potential reversal points. Developed by J. Welles Wilder — the same creator of RSI and ATR — it provides both trend direction and automatic stop-loss levels.
Key insight: The dots accelerate toward price as the trend matures. Early in a trend, the dots trail far behind price, giving the trend room to develop. As the trend extends, the dots close in, tightening the stop. When price touches the dots, the indicator 'reverses' — dots flip to the other side.
SAR stands for 'Stop And Reverse' because the system assumes you're always in the market — when one trade stops out, you immediately reverse to the opposite direction. In practice, most traders use it selectively.
Trading Application
Parabolic SAR works best in strongly trending markets. In sideways or choppy conditions, it generates frequent false signals as dots flip back and forth. Always determine if the market is trending before relying on SAR signals.
Combine SAR with a trend filter like the 200 EMA. Only take SAR buy signals when price is above the 200 EMA, and only take SAR sell signals when price is below it. This simple filter dramatically reduces whipsaws.
This indicator works best when combined with price action analysis. Never trade indicators alone - always confirm with the chart.
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Compare this reference with related structures and readings before applying it to a live chart.