Parabolic SAR

The Parabolic SAR is a trailing stop that follows price and flips to the other side when it is hit. SAR stands for “stop and reverse”: when price crosses the stop, the system closes the position and opens one in the opposite direction. J. Welles Wilder introduced it in 1978 in New Concepts in Technical Trading Systems, the same book that introduced RSI and ATR. On a chart it appears as a row of dots below price in an uptrend and above price in a downtrend.

How it is calculated

SAR(next) = SAR + AF x (EP - SAR)

EP = extreme point: the highest high of the current uptrend
     (or the lowest low of the current downtrend)
AF = acceleration factor: starts at 0.02, rises by 0.02 each
     time a new EP is set, up to a maximum of 0.20

In an uptrend the stop starts at the previous extreme low and moves up every bar, whether price rises or not. Each new high raises the acceleration factor, so the stop closes in faster the longer the trend runs: that gives the curve its parabolic shape. The stop is never placed above the lows of the last two bars. When price falls through it, the SAR flips to the previous high, the acceleration factor resets to 0.02, and the same process runs downward.

How traders use it

• Trailing stop. The most common use: hold a long position while the dots stay below price, and exit when a bar closes on the other side of the stop. It works the same way for shorts.
• Trend direction. Dots below price mark an uptrend, dots above a downtrend. A flip shows that the latest swing has failed.
• Entries in the trend direction. Rather than reversing on every flip, many traders take only the flips that agree with the larger trend, for example bullish flips while price is above its 200-day average.
• Pairing with a trend-strength filter. Parabolic SAR is always in the market, so it whipsaws in sideways markets. Requiring ADX above 20 to 25 is a common way to use it only when a trend is present.

Settings and common mistakes

• Step and maximum. Wilder’s 0.02 step and 0.20 maximum are the standard. A larger step or maximum tightens the stop and causes more flips; a smaller one gives the trend more room but gives back more profit at the turn.
• Using it in a range. In a sideways market the SAR flips back and forth and each flip is a small loss. Check that the market is trending first.
• Treating a flip as a forecast. A flip means the stop was hit, nothing more. It says nothing about how far the new move will go.
• Ignoring volatility. The stop distance depends on time and the trend’s extremes, not on how volatile the stock is. For a stop sized to volatility, look at ATR-based stops.

Live chart: SPY (S&P 500 ETF), daily, with Parabolic SAR (0.02, 0.2). The chart updates every trading day.

Screen for it on MarketInOut

Parabolic SAR is built into our formula language as psar(step, max_step), with events for a flip (rev_bull, rev_bear) and for its position (ibp: the stop is below price). Stocks above their 200-day average whose SAR just flipped bullish:

exch(nyse,nasdaq) and type(stock) and price > 1 and advol(21) > 1
and price > sma(200) and psar(0.02,0.2) rev_bull

Stocks in a SAR uptrend with a strong trend reading on ADX:

exch(nyse,nasdaq) and type(stock) and price > 1 and advol(21) > 1
and psar(0.02,0.2) ibp and adx(14) > 25

In the strategy backtester, adding stopat(psar(0.02,0.2)) to the closing formula moves the stop-loss to the SAR on every bar.

Related: Average True Range (ATR), ADX and DMI, Moving averages.