Parabolic SAR
A trend-following indicator that provides stop-and-reverse levels on the chart.
The Parabolic SAR (Stop and Reverse) places dots above or below the price to indicate the current trend direction and potential reversal points. When dots are below price, the trend is up. When dots are above price, the trend is down. Created by J. Welles Wilder, the SAR accelerates as the trend progresses — the dots move closer to price over time, creating a trailing stop effect that tightens as momentum builds.
Why It Matters
Options traders need clear rules for when to enter, when to hold, and when to exit. Parabolic SAR provides all three. The dot flip from below to above price is a defined exit signal for bullish positions and a potential entry for bearish ones. This removes emotion from the equation and replaces it with a systematic trigger.
The trailing nature of the SAR is particularly useful for managing winning options positions. Instead of setting a fixed profit target, you can trail your position using the SAR dots, letting winners run while the trend remains intact and closing when the dots flip. This approach can capture larger moves than rigid profit targets.
How It Works
How the dots move:
- In an uptrend, the SAR dot starts at the most recent low and moves upward each period. The speed of acceleration is controlled by an acceleration factor (AF), which starts at 0.02 and increases by 0.02 each time the stock makes a new high, up to a maximum of 0.20.
- In a downtrend, the dot starts at the most recent high and moves downward.
- When price touches or crosses the SAR dot, the indicator "reverses" — dots flip from below to above price (or vice versa).
Key signals:
- Dots below price: Uptrend in effect. Hold bullish positions.
- Dots above price: Downtrend in effect. Hold bearish positions or stay out.
- Dot flip from below to above: Uptrend may be ending. Close long calls, consider bearish strategies.
- Dot flip from above to below: Downtrend may be ending. Close short positions, consider bullish strategies.
Strengths: Clear, unambiguous signals. No interpretation needed — dots are either above or below. Excellent as a trailing stop mechanism.
Limitations: Parabolic SAR struggles in sideways, choppy markets. The dots flip constantly, generating whipsaw after whipsaw. It works best on trending stocks with a clear directional bias. Always check whether a stock is trending (use ADX) before relying on SAR signals.
Quick Example
A stock breaks above resistance at $60 and the Parabolic SAR flips — dots move below price at $58.50. You buy a call with 45 days to expiration. Over the next three weeks, the stock trends to $67 while the SAR dots trail upward from $58.50 to $64. When the stock reverses and closes below $64, touching the SAR, the dots flip above price. You close the call and lock in profits. The SAR acted as your trailing stop throughout the trade.