Trend indicators
Parabolic SAR
Dots below the price in an uptrend and above it in a downtrend, used as a trailing stop that tightens as the trend continues.
The idea in plain words
SAR stands for "stop and reverse". The dots follow the price and accelerate as the trend makes new extremes. When the price touches the dots, the trend is considered over and the dots jump to the other side.
How it is calculated
Each candle the dot moves towards the extreme price of the trend (highest high in an uptrend) by a fraction called the acceleration factor. That factor starts at 0.02 and grows by 0.02 with each new extreme, up to 0.2.
SAR tomorrow = SAR today + AF × (extreme point − SAR today)
AF starts at 0.02, +0.02 at each new extreme, at most 0.20
If the price crosses the SAR, the trend flips: SAR = previous extreme, AF back to 0.02How to use it
- Trailing stop: in a long trade, move your stop to the dot each candle.
- Dots flipping sides marks a possible trend change.
- Combine with a trend-strength tool such as ADX: SAR works best in trends.
Drawing conclusions
- Dots far from the price early in a trend, then closing in: the trend is maturing.
Example
In a gold uptrend the dots climb from 2,300 to 2,380 under the candles. When a sharp drop closes below 2,380, the dots switch above the price: a long trader would exit there.
Prices in examples are illustrative.
Watch out for
- In sideways markets the dots flip constantly and give many losing signals.
A little history
J. Welles Wilder Jr., 1978, "New Concepts in Technical Trading Systems".
Educational content only. No indicator or pattern predicts the future, and nothing here is investment advice.