Parabolic SAR
The Parabolic SAR is one of the most visually striking indicators on the chart. Unlike moving averages, which appear as flowing lines, the Parabolic SAR shows up as a series of dots—either above or below the price. These dots act as a guide to where the market might be headed next, helping traders make quick decisions about trend direction and possible reversals.
SAR stands for Stop and Reverse, which is exactly what this tool is designed to identify. It follows the price and flips its position when the market shows signs of changing direction. It’s not a forecasting tool—it’s a reactive one—but in trending conditions, it can be incredibly effective.
How the Parabolic SAR Works
The Parabolic SAR calculates its position based on price movement and acceleration. When the market is in an uptrend, the dots appear below the candles. When the market begins to reverse, the dots flip and begin to appear above the candles.
The indicator tightens as the trend continues, and when a reversal happens, it resets on the opposite side. This helps traders spot potential entry or exit points and even set trailing stop-losses.
Here’s how it compares to some other common tools:
How Traders Use It
The Parabolic SAR is typically used to track trends and trail stop-losses. When the dots appear below the price, it signals upward momentum. When they flip above the price, it suggests downward momentum.
A common strategy is to use the Parabolic SAR as a confirmation tool. For example, if you’re already in a trade and the dots flip sides, that might be your cue to exit. Alternatively, some traders use it as a standalone entry signal—buy when the dots appear below, and sell when they appear above.
Example Setup
Let’s say you’re trading a trending currency pair on the one-hour chart. The price is moving steadily upward, and the Parabolic SAR dots are climbing just beneath each candle. As long as the dots stay below the price, you remain in the trade.
Suddenly, the dots flip above the candle. That’s your cue—either take profits or tighten your stop. The SAR has just signaled that the trend might be reversing.
Pros and Cons of Using Parabolic SAR
Pros
- Visually simple and easy to interpret
- Great for setting trailing stops in trending markets
- Reacts quickly to shifts in direction
- Can be used for both entries and exits
Cons
- Generates false signals in sideways or range-bound markets
- Not ideal as a standalone strategy
- Can cause early exits if used too aggressively
When to Use the Parabolic SAR
The Parabolic SAR works best in strong trending markets where price is moving in a clear direction. It gives you a fast, visual way to stay with the trend and know when it might be time to step out. It’s not perfect—and it’s definitely not built for flat markets—but when price is running, this tool can help you ride the wave.
Whether you’re looking for a way to lock in profits or catch a potential reversal, the Parabolic SAR is a practical tool that traders of all experience levels can benefit from. Learn the Average Directional Index(ADX) NEXT!!