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Parabolic SAR Indicator

Parabolic SAR (Stop and Reverse) is a trend-following indicator plotted as a series of dots above or below price, designed to flag potential trend reversals and double as a trailing stop.

What is the Parabolic SAR Indicator?​

Developed by J. Welles Wilder Jr. and introduced in his 1978 book New Concepts in Technical Trading Systems, Parabolic SAR determines the direction of an asset's momentum and marks potential reversal points based on prices staying within a parabolic curve during a strong trend.

  • Dot below price: bullish; the asset is trending up
  • Dot above price: bearish; the asset is trending down

How to Read Parabolic SAR​

  • Dots flip from below to above price: potential trend reversal from up to down; often read as an exit or short signal
  • Dots flip from above to below price: potential trend reversal from down to up; often read as an entry or long signal
  • As a trend continues, the dots move progressively closer to price; this is what makes Parabolic SAR useful as a trailing stop, not just a directional signal

Best Use Cases​

  1. Determining Trend Direction: the dot flip is a clear, visual reversal signal.
  2. Trailing Stops: the accelerating dots naturally tighten a stop as a trend matures, locking in profit while staying in the trade.
  3. Entry and Exit Points: many traders use the flip itself as the trigger to enter or exit a position.
note

Parabolic SAR works best in trending markets. In sideways, choppy conditions it tends to flip frequently and generate false signals; pairing it with ADX to confirm trend strength is a common fix.

Parabolic SAR PineScript for TradingView​

Here's a ready-to-use Parabolic SAR strategy template. Paste it into the Pine Editor, adjust the acceleration factor start, increment, maximum, target, and stop loss to your preference, and backtest it.

info

To learn how to add this pinescript in TradingView, click here.

warning

This strategy is for demonstration purposes only and is not intended for actual trading. AlgoTest is not responsible for any profit or loss arising from the use of this sample strategy.

//@version=5
strategy("Parabolic SAR Strategy", overlay=true)

// Input parameters
af_start = input.float(0.02, title="Acceleration Factor Start")
af_increment = input.float(0.02, title="Acceleration Factor Increment")
af_maximum = input.float(0.2, title="Acceleration Factor Maximum")

target_points = input.int(100, title="Target Points")
stop_loss_points = input.int(50, title="Stop Loss Points")

// Calculate Parabolic SAR
sar = ta.sar(af_start, af_increment, af_maximum)

// Strategy logic
long_condition = ta.crossover(close, sar)
short_condition = ta.crossunder(close, sar)

// Plot Parabolic SAR
plot(sar, color=color.blue, title="Parabolic SAR", offset=-1)

// Strategy entry and exit
if long_condition
    strategy.entry("Long", strategy.long)
if short_condition
    strategy.entry("Short", strategy.short)

// Calculate target and stop loss levels
long_target = strategy.position_avg_price + target_points
long_stop_loss = strategy.position_avg_price - stop_loss_points
short_target = strategy.position_avg_price - target_points
short_stop_loss = strategy.position_avg_price + stop_loss_points

// Strategy exit
strategy.exit("Long Exit", "Long", limit=long_target, stop=long_stop_loss)
strategy.exit("Short Exit", "Short", limit=short_target, stop=short_stop_loss)

Once you've backtested it, you can connect the alert to AlgoTest to automate live execution without manually watching the chart.

FAQ​

Is Parabolic SAR a good indicator?​

Yes, Parabolic SAR can be highly effective in trending markets for determining potential reversals, entries, and exits. It performs poorly in sideways, range-bound markets.

What do Parabolic SAR dots indicate?​

The dots represent potential reversal points. Dots below the price indicate a bullish trend, while dots above indicate a bearish trend.

What is the best strategy for Parabolic SAR?​

One effective approach is combining Parabolic SAR with other indicators like MACD or RSI to confirm trend direction and potential reversal signals before acting on a flip.

How is Parabolic SAR calculated?​

Parabolic SAR is calculated using a formula that factors in the previous period's SAR, the extreme point (EP) of the previous period, and the acceleration factor (AF), which increases as the trend extends.

What is the best setting for Parabolic SAR?​

The default settings are usually a step of 0.02 and a maximum of 0.2, but these can be adjusted based on the asset and market conditions to make the indicator more or less sensitive.

For more insights and detailed analysis tools, visit AlgoTest Signals.