Sar trading: Parabolic SAR Indicator: Definition, Formula, Trading Strategies

price action

To trade using the parabolic SAR, you first need to understand what the different signals mean. The parabolic SAR will produce a series of dots – known as a parabolic line – above and below the price movements in an asset’s market chart. What this calculation does is create a dot below the rising price action, or above the falling price action. They are always present, though, which is why the indicator is called a «stop and reverse.» When the price falls below the rising dots, the dots flip on top of the price bars. When the price rallies through falling dots, the dots flip below the price below.

Enter the very next price candle after the dot appears above the candle. Waiting for one candle after makes sense because this proves to us that this reversal is strong. The moving averages are supporting the downtrend + the dot is signifying a downtrend. The parabolic SAR indicator is used to track price changes and trend reversals over time.

In a long trade, the 40 period moving average will cross and go below the 20 period moving average. The parabolic stop and reversal formula showed us that the price stalled out for a few hours and then the dot appeared above the candle. The 20 period moving average is Red and the 40-period moving average is Green in this example. The difference between the uptrend and downtrend formula is whether the second part of the formula is added or subtracted. It’s important to note, without properly identifying the direction of the current trend, your PSAR calculations will be moving in the wrong direction. To change the technical indicator settings, hover your cursor over the chart and click on the indicator name in the upper left of the chart.

Because it follows price movements, it can also be used as a trailing stop-loss​. This allows the trader to capture large profitable trends when they occur, providing an exit point when the price may be starting to reverse. First, a longer-term timeframe shows the trend direction based on the direction of the parabolic SAR. Once the long-term trend direction is determined, trades are taken on a shorter timeframe, but only in the direction of the longer-term trend. For example, the daily chart of gold with a parabolic SAR attached shows that price is currently in an uptrend.

Investopedia does not provide tax, investment, or financial services and advice. Investing involves risk, including the possible loss of principal. The indicator utilizes a system of dots superimposed onto a price chart. Investopedia requires writers to use primary sources to support their work. These include white papers, government data, original reporting, and interviews with industry experts. We also reference original research from other reputable publishers where appropriate.


The PSAR looks at extreme highs and lows and then applies an acceleration factor. These varying formulas look very different on the chart and will provide different analytical insights and trade signals. The parabolic SAR indicator is used by traders to determine trend direction and potential reversals in price. On a chart, the indicator appears as a series of dots placed either above or below the price bars. Conversely, a dot above the price is used to illustrate that the bears are in control and that the momentum is likely to remain downward. When the dots flip, it indicates that a potential change in price direction is under way.

Rule #2 — The Parabolic SAR Indicator must change to be above price candle.

Technically you could, trade a reversal trading strategy like this and might win some, but this is a very risky way to trade the parabolic SAR indicator. You need other tools to validate a reversal trading strategy. IV.II Rule #4 — Parabolic SAR dot must be above price candle AND moving averages cross to where 20 period MA is below 40 period MA. The much bigger profits come when there are big trending moves. A big move is any move that would have resulted in a substantial profit based on the parabolic SAR basic entry and exit trading signals. In this article, we will discuss the pros and cons of the indicator, and look at how and when it should be used.

When the price is declining, the parabolic SAR is above the price. When the parabolic SAR drops below the price, this indicates a pullback to the upside. A parabolic SAR breakout strategy works best in assets that are strongly trending. If the price is moving in no apparent direction, then it will seesaw across the parabolic SAR, resulting in multiple unprofitable trades. You should make sure you have the appropriate risk management​​ measures in place.


VII Tap on the E-Book Cover Below to get your copy of this Free strategy today. The Maximum Acceleration works the same in a way, but to a much lesser degree. The MA caps how quickly the indicator can accelerate during a strong price move. Changes in this setting will have less impact than changing the AF. The parabolic SAR indicator is complex to compute by hand, even though it was introduced in 1978 by J.

You can learn more about the standards we follow in producing accurate, unbiased content in oureditorial policy. The technical indicator uses a trailing stop and reverse method called «SAR,» or stop and reverse, to identify suitable exit and entry points. This trade would have been a +203 pip profit using the MA cross exit approach. The combination of these indicators will give you accurate trend reversal setups.

This is because a reversal is generated when the SAR catches up to the price due to the acceleration factor in the formula. Therefore, a reversal signal may get a trader out of a trade even though the price hasn’t technically reversed. An ascending triangle is a chart pattern used in technical analysis created by a horizontal and rising trendline. The pattern is considered a continuation pattern, with the breakout from the pattern typically occurring in the direction of the overall trend. For example, SAR sell signals are much more convincing when the price is trading below a long-term moving average. The parabolic SAR is a technical indicator used to determine the price direction of an asset, as well as draw attention to when the price direction is changing.


HP stands for high point, which is the highest high in a current uptrend. Similarly, LP stands for low point, which is the lowest low in a current downtrend. The formulas used are different if the SAR is rising on an uptrend versus falling on a downtrend . This is probably the easiest indicator to interpret because it assumes that the price is either going up or down. With that said, this tool is best used in markets that are trending, and that have long rallies and downturns. From the image above, you can see that the dots shift from being below the candles during the uptrend to above the candles when the trend reverses into a downtrend.


Any of the strategies discussed above can be applied to the forex market. As mentioned earlier, the indicator works best when there are large price movements. On the left side of the EUR/USD daily chart, the price action​​ is choppy.

The average true range is a market volatility indicator used in technical analysis. However, many trading platforms – including the IG trading platform – enable you to overlay the parabolic SAR onto any price chart at the click of a button. Your exit criteria are when the 20 and 40-period lines cross over again. OR when the dot reverses appears at the bottom of the candle. Rule #2 — The Parabolic SAR Indicator must change to be above price candle.

Consequently any person acting on it does so entirely at their own risk. Any research provided does not have regard to the specific investment objectives, financial situation and needs of any specific person who may receive it. Although we are not specifically constrained from dealing ahead of our recommendations we do not seek to take advantage of them before they are provided to our clients. The parabolic SAR is designed for trend traders who want to know when a market’s momentum might change direction.

Introduction to the Parabolic SAR

II.II Rule #2 — The Parabolic SAR Indicator must change to be above price candle. Combined with other rules and analysis, the parabolic SAR can form part of a robust trading strategy​​. To indicate whether the price is recently rising or falling, and when a reversal may occur. Basically, when the dots are below the candles, it is a BUYsignal. One indicator that can help us determine where a trend might be ending is the Parabolic SAR . Determine significant support and resistance levels with the help of pivot points.

Also, when there is a move against the trend, the indicator gives an exit signal when a price reversal could occur. This tool works best in trending markets with long rallies or declines. Wilder recommended using other indicators like the average directional index momentum indicator to confirm the strength of the existing trend. Other indicators that complement the SAR trading signals include moving averages and candlestick patterns. Welles Wilder to determine the direction that an asset is moving. The indicator is also referred to as a stop and reverse system, which is abbreviated as SAR.

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Like any charting indicator, the parabolic SAR works equally well in any time frame. To determine which time frame works best, you should consider your trading strategy. Day traders may use one-minute, five-minute, or one-hour time frames, while swing traders may use daily, weekly, or monthly time frames. Wells Wilder, is used by traders to determine trend direction and potential reversals in price.

When the price is moving sideways, the trader should expect more losses and/or small profits. You can use other trend trading technical indicators alongside the parabolic SAR to attempt to confirm the prevailing trend or any potential trend reversals. Examples of trend trading technical indicators include the moving average indicator, the relative strength index and the average directional index . The major drawback of the indicator is that it will provide little analytical insight or good trade signals during sideways market conditions. Without a clear trend, the indicator will constantly flip-flop above and below the price. This type of price action can last all day, so if a day trader relies solely on the parabolic SAR for trade signals, it could be a big losing day.

No strategy can give you a 100% win ratio so always be placing your stops at the appropriate areas. I would recommend practicing both short and long trades with this moving average trading strategy. Scalping is a short-term trading strategy where the trader enters and exits trades as quickly as possible, opening multiple positions within a day. Scalpers​​ often use a one-minute chart, and our online trading platform also allows you to trade with one, five, 10, and 30-second charts as well.

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