What Is Parabolic SAR?
The Parabolic SAR (Stop and Reverse) is a trend-following indicator that places dots on the chart — below price during uptrends and above price during downtrends. When the dots flip sides, it signals a potential trend reversal. The indicator was developed by J. Welles Wilder and is designed to provide both trend direction and trailing stop levels.
How Parabolic SAR Works
The SAR dots accelerate toward price as the trend matures (controlled by an acceleration factor, typically starting at 0.02 and increasing to a maximum of 0.2). This means the trailing stop tightens over time — wider at the start of a trend and progressively tighter as the trend extends. When price crosses through a dot, the system "stops and reverses."
Why It Matters for Traders
Parabolic SAR is most useful as a trailing stop mechanism in trending crypto markets. During a confirmed uptrend, using SAR dots as your stop level automatically tightens the stop as profit accumulates. The weakness is in sideways markets where the constant stop-and-reverse generates whipsaw losses. Filtering SAR signals with a trend indicator (like ADX above 25) eliminates most false signals.
