Parabolic SAR indicator: formula, settings and how to use it as a trailing stop
What is the Parabolic SAR?
The Parabolic SAR indicator plots a series of dots above or below price. SAR stands for Stop And Reverse. Dots below price show an up-trend reading; dots above price show a down-trend reading. When price touches the dots, they jump to the other side and the reading reverses.
J. Welles Wilder designed it in 1978 as a trailing stop that speeds up as a trend matures. The dots start some distance from price and then curve closer, which is where the word "parabolic" comes from. It is closely related in spirit to Supertrend, but uses time and acceleration instead of ATR.
EP = extreme point (highest high in an up-trend, lowest low in a down-trend)
AF starts at 0.02, rises by 0.02 each time a new EP is made, capped at 0.20
How the Parabolic SAR formula works
Extreme point (EP)
In an up-trend, EP is the highest high since the trend began. In a down-trend, it is the lowest low.
Acceleration factor (AF)
AF starts at 0.02. Every time price makes a new EP, AF increases by 0.02, up to a maximum of 0.20. The longer and stronger the trend, the faster the dots close in.
The update
Next SAR = current SAR + AF × (EP − current SAR). In an up-trend, SAR is also not allowed to rise above the lows of the last two candles, so it never jumps into the current price action.
Illustration
Current SAR is 24,100, EP is 24,200 and AF is 0.06. Next SAR = 24,100 + 0.06 × 100 = 24,106. If price makes a new high at 24,220, AF becomes 0.08 and the dots move faster.
How to read Parabolic SAR
- Dots below candles: up-trend reading.
- Dots above candles: down-trend reading.
- Gap between dots and price: wide gap early in a trend, narrowing as AF rises.
- Flip: when price crosses the dots, the indicator reverses and starts again from the prior EP with AF reset to 0.02.
The dots are best read as "where the trend reading would be cancelled". They are a trailing stop reference, not a forecast.
Best Parabolic SAR settings for NIFTY 5-minute
| Start / step / max | Behaviour |
|---|---|
| 0.02 / 0.02 / 0.20 | Wilder's default; reasonable on 5- and 15-minute |
| 0.01 / 0.01 / 0.10 | Slower, fewer flips; holds trends longer |
| 0.03 / 0.03 / 0.30 | Faster, tighter; more whipsaws |
On 5-minute BANKNIFTY, which swings faster, the default can flip often. Slowing the step to 0.01 reduces flips at the cost of later exits. Test one setting over many sessions and keep it.
Parabolic SAR strategy ideas (educational)
Trailing stop
The original purpose: once in a trending position, move the stop to each new SAR dot. Because AF accelerates, the stop tightens as the move matures and protects more of the gain.
Trend filter with a slower tool
Pair SAR with a 200 or 50 EMA or VWAP. Only pay attention to SAR flips that agree with price's side of the slower reference.
ADX filter
SAR suffers in ranges. Using ADX above 20 to 25 as a condition removes many of the flips that happen during choppy sessions.
When Parabolic SAR fails
Parabolic SAR is always on: it is always either long or short. In sideways markets that is a weakness, because it keeps flipping as price oscillates. On a narrow-range NIFTY day it can reverse eight or ten times.
It can also exit early in strong but jagged trends, because the accelerating dots catch up with a normal pullback. Traders who hold positions for longer often lower the maximum AF or use the SAR only as a final, rather than primary, exit.
Telling a real flip from a weak one
A flip has more weight when several things line up: price closes through the dots rather than just wicking through them, the close also breaks a visible swing high or low, volume on the flip candle is above the recent average, and the higher-timeframe chart points the same way. A flip that happens on a small candle, inside the opening range or inside a narrow lunch-hour range, with no change in structure, is usually just the indicator reacting to noise.
It also helps to know the session rhythm. NIFTY often trends in the first hour and again after 14:30 IST, and drifts sideways in between. Many of the SAR's whipsaws cluster in that middle period, so some traders simply give less weight to flips between roughly 12:00 and 13:30.
Combining Parabolic SAR with volume and footprint
A SAR flip that comes with a high-volume candle and strong delta on the footprint chart reflects real participation. A flip on a thin, low-delta candle in the lunch hour is more likely noise.
Also compare the trend reading with OBV or cumulative delta. When the dots stay below price but CVD is falling, buyers may be losing commitment even though price is still drifting up.
Worked NIFTY example (illustration)
Illustration with plausible numbers. NIFTY breaks above the previous day's high at 24,180 at 10:05 on strong volume. Parabolic SAR (0.02, 0.02, 0.20) flips below price at 24,140.
Over the next 90 minutes NIFTY makes six new highs; AF climbs to 0.14 and the dots rise to 24,232 while price trades at 24,260. A normal 25-point pullback at 12:00 touches the dots and flips them above price, even though the 15-minute trend is still up. This shows both strengths and weaknesses: it trailed the move tightly but exited on an ordinary pullback. Trading F&O carries a high risk of loss; this is only an illustration of behaviour.
Common Parabolic SAR mistakes
- Treating every flip as a reversal in a range.
- Using it as the only tool, with no trend or volume filter.
- Raising AF to catch turns earlier, then suffering more whipsaws.
- Forgetting the dots reset after each flip.
- Placing stops exactly on the dot on a volatile instrument without considering ATR.
Seeing it on the TradingMarble chart
On the TradingMarble chart you can add Parabolic SAR with your own start, step and maximum values and see it next to footprint and volume. That makes it easy to study which flips came with real buying or selling. See features.
Parabolic SAR checklist
- Is the market trending (ADX) or ranging?
- Does the SAR side agree with VWAP or the slower trend?
- Did the flip come with volume and delta?
- Is the dot distance a sensible stop versus ATR?
The Parabolic SAR is a neat trailing-stop tool for trends; give it a filter and it becomes far more useful.
Frequently asked questions
What is Parabolic SAR used for?
Parabolic SAR is mainly used as a trailing stop and trend direction reference. Dots below price indicate an up-trend reading and dots above indicate a down-trend reading. As the trend continues, the dots accelerate toward price, tightening the stop.
What are the best Parabolic SAR settings?
Wilder's default of 0.02 start, 0.02 step and 0.20 maximum is the common choice on 5-minute and 15-minute charts. Slower settings like 0.01, 0.01, 0.10 reduce flips in volatile instruments like BANKNIFTY. Faster settings produce more whipsaws.
What does SAR stand for?
SAR stands for Stop And Reverse. The indicator always holds a trend reading, and when price crosses the dots it stops the current reading and reverses to the other side.
Why does Parabolic SAR give false signals in sideways markets?
Because it is always either in an up-trend or down-trend reading, it keeps flipping when price oscillates within a range. Each flip arrives after the small move has already happened. Trend filters like ADX or moving averages reduce this problem.
Is Parabolic SAR better than Supertrend?
They solve similar problems differently. Supertrend uses ATR bands and keeps a steady distance based on volatility. Parabolic SAR accelerates with time and new extremes, so it tightens faster in long trends. Supertrend usually flips less often; SAR trails more tightly.
What is the acceleration factor in Parabolic SAR?
The acceleration factor controls how quickly the dots move toward price. It starts at 0.02 and increases by the step each time a new extreme point is made, up to the maximum. A higher AF means faster, tighter trailing.