Lesson 1 of 4
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Parabolic SAR (11 mins)

Phillip Konchar

What is Parabolic SAR

Parabolic SAR (Stop And Reverse) is a lagging indicator that helps traders identify trend endings and potential reversals.

Parabolic SAR started life as a trend following trading system. While its value as a system has weakened over the years it is good at helping alert traders to changes in the trend.

What is the Parabolic SAR Formula

The way Parabolic SAR works is it calculates the next period’s value before the period starts. If the price hits the value set in that period essentially the trend has ended.

It has two formulas – one for an uptrend and one for a downtrend.

Uptrend Formula:  Next period SAR = Previous SAR + Acceleration factor x (Extreme point – Previous SAR) 

Downtrend Formula:  Next period SAR = Previous SAR – Acceleration factor x (Previous SAR – Extreme point) 

Extreme point = The highest price of the current uptrend.

Acceleration Factor (Step) = Increases by the minimum step, which is usually set at 0.02, each time the extreme point makes a new high, up to the maximum step level, which usually has the typical value of 0.2.

This formula can be seen as very complicated but do not worry, we have examples on the student materials tab to help you understand and your charting package will calculate everything for you.

SAR on a chart

The formula might be complicated but the output is simple – its either a dash above or below each candle on the chart. In an uptrend, the dashes are below the current price and in a downtrend, the dashes are displayed above the chart.

When the trend starts faltering, and price hits the Parabolic SAR’s dash for that period the parabolic SAR switches trends, it is stopping and reversing, and the other formula starts being used.

Notice how the shape curves towards price – this is a parabolic shape and it gives the indicator its name. When it was first used as a trading system it was designed to give the trend time to develop but then get the trader out of a trade faster the further into a trend.

Reducing the sensitivity of the indicator using the max and min step variables will reduce the number of stops and reverses but we’ll just keep the default settings for now.

Key Learning Points
  • Parabolic SAR is a lagging indicator that helps identify trend endings and potential reversals.
  • It has two formulas – one for an uptrend, one for a downtrend.
  • The output from the indicator is a series of dashes above and below the price to indicate the trend.
  • The parabolic nature of the output means it gives the trend space to develop but cuts the trader out of the trend faster the further it goes.
If you’re happy with everything please click ‘complete’ to move on. You will be able to come back to the lesson.

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