Parabolic SAR

The Parabolic SAR (Stop and Reverse) is a technical indicator developed by J. Welles Wilder Jr. that provides potential entry and exit points by placing a series of dots (points) either above or below the price chart. When dots are below the price, the trend is bullish and the dots serve as a trailing stop-loss that moves upward. When dots flip above the price, the trend has reversed to bearish and the dots provide a downward trailing stop. The "parabolic" name comes from the indicator's characteristic acceleration: the dots move slowly at first when a trend begins and then accelerate as the trend strengthens, eventually catching up to price and triggering a reversal signal. The SAR is calculated using an acceleration factor (AF) that starts at 0.02 and increases by 0.02 each time a new extreme point is made, up to a maximum of 0.20. The indicator excels in trending markets, providing clear entry signals (dot flip) and automatic stop-loss management. However, it generates frequent false signals in choppy, range-bound markets because the dots flip back and forth rapidly. Many traders use it in combination with trend-confirming indicators like ADX — only taking SAR signals when ADX confirms a trend is present.