Parabolic SAR
A trailing stop-and-reverse system that plots dots above or below price to track trend direction and suggest exit points.
Overview
Parabolic SAR (Stop and Reverse) was also developed by J. Welles Wilder Jr. and introduced in the same 1978 book as ADX. It is designed as a complete trading system: it generates entry signals, tracks the trend, and provides trailing stop levels that accelerate as the trend matures. The "parabolic" name comes from the curved shape the stop dots form as the acceleration factor increases.
How it looks on a chart
Illustration only — synthetic data generated for visual reference.
Parabolic SAR appears as a series of dots plotted on your price chart. When the dots are below the price candles, the trend is considered up — the dots act as a rising support floor and potential stop-loss level. When the dots are above price, the trend is down and the dots form a falling resistance ceiling. The dots move closer to price over time within a trend. This acceleration means the stop gets tighter the longer a trend runs, automatically protecting profits as a move matures. When price eventually touches a dot, the SAR "reverses" — the dot flips to the other side and you would exit the current trade and enter in the opposite direction. The simplest use of Parabolic SAR is as a trailing stop. If you are long a stock, place your stop just below the SAR dot. As the dots rise each day, raise your stop accordingly. This keeps you in the trade during healthy trends and exits you automatically when momentum fades.
The SAR calculation uses an Acceleration Factor (AF) that starts at 0.02 and increases by 0.02 each time a new extreme point (EP) is set during the trend, up to a maximum of 0.20. The formula is SAR(t) = SAR(t-1) + AF × (EP - SAR(t-1)), where EP is the highest high in an uptrend or lowest low in a downtrend. The initial AF of 0.02 and maximum of 0.20 are Wilder's original defaults. Increasing the starting AF makes the SAR more responsive but generates more reversals. Increasing the step also speeds up the acceleration. In volatile markets, a lower maximum AF (0.15) reduces noise; in trending, low-volatility assets, a higher maximum (0.25) can capture more of the move. Parabolic SAR works best in strongly trending markets. In choppy or sideways conditions, it generates a series of rapid reversals, each one a losing trade. For this reason, it is almost always combined with ADX — only taking SAR signals when ADX > 25 dramatically improves its risk-adjusted performance.
The acceleration mechanism of Parabolic SAR is analogous to a momentum-adjusted trailing stop. As the trade becomes more profitable (new EPs being set), the system becomes increasingly impatient, tightening the stop faster. This embeds a convexity bias: small profits are allowed to run, but the exit becomes more aggressive as gains grow — the opposite of the disposition effect common in human traders. A known pathology is that after a reversal, the SAR can initialize far from current price (using the EP from the prior trend), creating a very wide stop on the new trade. Some implementations cap the initial SAR distance at 2× ATR to mitigate this. In portfolio backtesting, Parabolic SAR functions well as a position management tool rather than a standalone entry signal. Research by Kaufman (2013) shows that SAR-based trailing stops applied to trend-following CTA strategies improve the Calmar ratio significantly on 10+ year backtests because they systematically cut losses in trend failures while allowing winners to run.
Formula
SAR(t) = SAR(t−1) + AF × (EP − SAR(t−1)) AF starts at 0.02, increases by 0.02 per new EP, max 0.20
- 1.Identify the initial trend direction; set EP = highest high (uptrend) or lowest low (downtrend).
- 2.Set initial SAR = the prior swing low (uptrend) or swing high (downtrend), AF = 0.02.
- 3.Each bar: SAR(t) = SAR(t−1) + AF × (EP − SAR(t−1)).
- 4.If price makes a new extreme point, update EP and increment AF by 0.02 (up to max 0.20).
- 5.If price crosses the SAR, reverse: flip trend direction, reset AF to 0.02, set new EP.
Parameters
| Parameter | Default | Range | Description |
|---|---|---|---|
| Start AF | 0.02 | 0.01–0.1 | Initial acceleration factor when a new trend begins. |
| Step AF | 0.02 | 0.01–0.05 | AF increment each time a new extreme point is set. |
| Max AF | 0.2 | 0.1–0.5 | Maximum value the acceleration factor can reach. |
Trading signals
bullish: SAR flips from above to below price
Trend reversal to upside — system enters long (or exits short).
bearish: SAR flips from below to above price
Trend reversal to downside — system enters short (or exits long).
bullish: Price holds above rising SAR dots
Uptrend intact — current long position should be maintained.
neutral: SAR dots rapidly converging toward price
Trend maturing — tighten stops and watch for potential reversal.
Limitations
- •Extremely poor in ranging or sideways markets — generates rapid stop-and-reverse whipsaws.
- •Must be filtered by a trend-strength indicator (ADX) to be usable in practice.
- •Acceleration mechanism can produce very tight stops during volatile trending moves, stopping out prematurely.
- •No concept of price targets — solely a trailing stop mechanism with no profit objective.
Gilito uses Parabolic SAR primarily as a dynamic stop-loss mechanism within its position management layer, testing it against fixed-ATR stops and percentage trailing stops across thousands of asset/parameter combinations. It is also tested as a standalone entry signal when gated by an ADX regime filter.