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

1. Using PSAR alone in a range — it will reverse on every wiggle and drain your account
2. Treating every flip as a new trade — many flips are noise; filter with ADX or a moving average
3. Ignoring the trend — PSAR is a trend tool; it punishes you in chop
4. No manual override — when price approaches a major S/R, tighten the stop yourself

How to start

1. Add the default Parabolic SAR (0.02, 0.02, 0.20) to a daily chart
2. Add the 200 SMA as a trend filter — only trail longs above it, shorts below
3. Use the dot as your trailing stop in clean trends
4. Stand aside when the market is choppy
5. 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.