Indicators / Trend / Parabolic SAR
Parabolic SAR Explained: Why Dot Flips Mislead Traders
Quick answer
Parabolic SAR (stop and reverse) places dots below price in an uptrend and above price in a downtrend, speeding up as the trend extends. It is a trailing-stop tool. A dot flip shows the stop was hit, not that a new trend has started.
Video: Parabolic SAR for Beginners.
What Parabolic SAR measures
J. Welles Wilder designed PSAR as a stop that tightens over time. Each new extreme in the trend speeds the dots up, so the stop closes in on price as the move matures.
How PSAR is calculated
The acceleration factor (AF) starts at 0.02 and rises by 0.02 at each new extreme, up to 0.20. When price touches the SAR, it flips to the other side and resets.
Settings
| Start / step | Maximum | Effect |
|---|---|---|
| 0.02 | 0.20 | Wilder's default |
| 0.01 | 0.10 | Slower, holds trends longer |
| 0.03 | 0.30 | Faster, tighter stops |
How to read Parabolic SAR
1. Dots show the trailing stop
Dots below price mark where a long position's stop would be. Dots above price mark a short position's stop.
2. Flips are exits, not entries
A flip means price touched the stop. In a range this happens constantly, so taking every flip as a new trade leads to repeated small losses.
3. Use it with a trend filter
Only act on flips in the direction of the bigger trend, and use the dots to manage the exit.
Common mistakes
- Treating flips as signals. They are stop hits.
- Using PSAR in ranges. It flips back and forth.
- Raising the AF too far. Stops become so tight that normal pullbacks hit them.
What to pair Parabolic SAR with
- ADX to confirm a trend exists.
- Moving averages for trend direction.
- SuperTrend as a looser trailing stop.
Parabolic SAR FAQ
Is a Parabolic SAR flip a buy signal?
Not on its own. A flip shows the trailing stop was hit. Use it with a trend filter.
What are the default PSAR settings?
A start and step of 0.02 and a maximum of 0.20.
Is PSAR better than SuperTrend?
They do a similar job. PSAR tightens faster as trends extend; SuperTrend keeps a volatility-based distance.