Parabolic SAR: Trailing Stops Made Simple
The Parabolic SAR dots trail price and signal reversals. Learn the PSAR formula, the acceleration factor, and how to use it for trailing stops.
Parabolic SAR: Trailing Stops Made Simple
Some indicators find entries. The Parabolic SAR finds exits — and it does it with dots.
The Parabolic Stop and Reverse (Parabolic SAR or PSAR), created by J. Welles Wilder in 1978, is a trend-following indicator that places dots above or below price. When the dots flip sides, the system signals a reversal — and the trailing dot gives you a built-in exit point.
The idea
In an uptrend, dots sit below price and trail upward. As the trend extends, the dots accelerate closer to price. When price finally touches a dot, the trend is considered over — the dots flip to above price, signalling a downtrend (and a short).
The formula
For an uptrend (dots below price):
SAR(today) = SAR(yesterday) + AF × (EP − SAR(yesterday))
Where:
AF = Acceleration Factor, starts at 0.02
EP = Extreme Point (highest high during the uptrend)
Rules:
- AF starts at 0.02 and increases by 0.02 each time a new high is made, up to a maximum of 0.20
- When price touches the SAR, the trend reverses — the SAR jumps to the prior extreme and AF resets to 0.02
Worked example — uptrend:
| Day | EP | AF | SAR |
|---|---|---|---|
| 1 | $50 | 0.02 | $46.00 |
| 2 (new high $51) | $51 | 0.04 | $46.08 |
| 3 (new high $52) | $52 | 0.06 | $46.27 |
The SAR accelerates upward as the trend strengthens — the dots "chase" price.
What PSAR tells you
| Signal | Meaning |
|---|---|
| Dots below price | Uptrend — stay long |
| Dots above price | Downtrend — stay short |
| Dots flip from below to above | Reversal down — exit longs |
| Dots flip from above to below | Reversal up — exit shorts |
| Dots far from price | Trend is early / weak |
| Dots close to price | Trend is mature / reversing soon |
How to use it
1. As a trailing stop
The simplest use: keep your stop just below the current dot in an uptrend. As price rises, the dot rises with it — locking in profit automatically.
2. As a reversal signal
When the dots flip, exit and consider reversing direction. Best in clean trends; whipsaws badly in ranges.
3. Combined with a trend filter
Pair PSAR with the ADX: only trail with PSAR when ADX > 25. In weak trends, PSAR's flipping will bleed your account.
The acceleration factor
| Setting | Effect |
|---|---|
| AF = 0.02, step 0.02, max 0.20 | Default — balanced |
| Higher AF (0.04+) | Closer dots, earlier exits, more whipsaws |
| Lower AF (0.01) | Looser dots, wider stops, fewer flips |
Beginners should stick with the default. Tightening the AF looks clever until you get stopped out by noise.
Common mistakes
- Using PSAR alone in a range — it will reverse on every wiggle and drain your account
- Treating every flip as a new trade — many flips are noise; filter with ADX or a moving average
- Ignoring the trend — PSAR is a trend tool; it punishes you in chop
- No manual override — when price approaches a major S/R, tighten the stop yourself
How to start
- Add the default Parabolic SAR (0.02, 0.02, 0.20) to a daily chart
- Add the 200 SMA as a trend filter — only trail longs above it, shorts below
- Use the dot as your trailing stop in clean trends
- Stand aside when the market is choppy
- Always confirm final risk with the stop loss calculator and size with the position size calculator
Summary
Parabolic SAR is the cleanest trailing-stop tool there is — dots that accelerate with the trend and flip when it ends. Use it in trending markets, pair it with a strength filter to avoid chop, and let the dots manage your exits while you focus on entries.