How it works
Parabolic SAR plots a dotted line of stop levels, below price in an uptrend and above it in a downtrend. SAR stands for stop and reverse: when price touches the dot, the position is not merely closed, it is flipped. The system is always in the market, which tells you immediately what it was designed for — it is a trade-management tool for trending instruments, not a signal generator for choppy ones.
The distinctive part is the acceleration factor. Each time the trend records a new extreme — a higher high in an uptrend — the factor increases by a fixed step, and the stop moves a larger fraction of the remaining distance toward that extreme. The longer and cleaner the trend, the more aggressively the stop tightens, which produces the parabolic curve the tool is named for. The logic is that a trend which has run a long way without a pause deserves less room, because the eventual reversal will be sharp.
In practice traders use SAR for exits far more than entries. Its exit discipline is genuinely good in a sustained move: it locks in progress mechanically, without judgement, and it never widens. Used as an entry system it is poor, because every exit is also an entry into the opposite direction, and in a range that means buying every top and selling every bottom.
Against Supertrend, its closest relative, SAR is the more aggressive of the two. Supertrend keeps a constant volatility-scaled distance and will sit through a normal pullback; SAR closes in relentlessly and gets clipped by pauses that Supertrend absorbs. Against a moving-average stop, SAR has the advantage of a precise, published level for tomorrow — you know before the session opens exactly where the trade dies.
Calculation
The arithmetic in words, in the order it happens.
While a trend is in force, tomorrow’s SAR equals today’s SAR plus the acceleration factor times the distance from today’s SAR to the extreme point, where the extreme point is the highest high reached during an uptrend or the lowest low during a downtrend. The acceleration factor starts at 0.02 and increases by 0.02 each time a new extreme point is set, capped at 0.20. In an uptrend the computed SAR is additionally clamped so it never sits above the lows of the previous two bars, and the mirror clamp applies in a downtrend. When price trades through the SAR the trend flips: the new SAR is set to the extreme point of the finished trend, the extreme point resets to the current bar’s extreme, and the acceleration factor resets to 0.02.
Source
An AlgoBeamScript implementation of the formula above, written by us from the arithmetic so the code and the calculation agree line for line.
Runs unchanged on the platform and in the AlgoBeamTS runtime. The language reference is in the documentation.
Inputs
Defaults are the values most charting packages ship with. They are conventions, not optimal settings — the right length depends on your instrument and your holding period.
| Input | Default | What it changes |
|---|---|---|
| Start | 0.02 | The initial acceleration factor immediately after a flip. Larger values pull the stop toward price from the very first bar, which cuts risk on a failed reversal but ends many good trades before they begin. |
| Increment | 0.02 | How much the factor rises at each new extreme. This controls how quickly the parabola tightens; halving it produces a far more patient trail that gives long trends room to breathe. |
| Maximum | 0.2 | The ceiling on the acceleration factor. It caps how tight the stop can become, which matters most in extended trends where the factor would otherwise reach the extreme point almost immediately. |
How to read it
What practitioners take from the plot. Read these as descriptions of market state, not as entry signals.
- Dots below price, spacing widening
- A young uptrend with the stop still far away. The most comfortable phase to hold, and the phase in which the stop offers the least protection.
- Dots below price, closing in rapidly
- The trend has made repeated new highs and the acceleration factor is near its cap. Progress is being locked in, and an ordinary consolidation will now end the trade.
- Dots flipping to the other side of price
- The trailing stop has been hit. As an exit this is the tool working as designed; as an entry in the opposite direction it is unreliable outside a clearly trending market.
- Dots flipping every few bars
- A range. SAR is structurally unable to sit out, so rapid alternation is its way of saying there is no trend to trail.
Limitations
Where this indicator misleads. None of these are fixed by a better parameter.
- It is always in the market. In sideways conditions that guarantees a sequence of losing reversals, which is the single largest source of loss for anyone trading it mechanically.
- The acceleration factor is driven by time and new extremes, not by volatility, so the same settings are far too tight on a noisy instrument and too loose on a quiet one.
- It ignores the size of the move entirely. A trend can run for months and SAR will still tighten to within a fraction of a percent, exiting on a routine pullback that has no bearing on the trend.
- The stop-and-reverse logic makes it a poor entry tool by itself; used that way it buys strength at the top of a range and sells weakness at the bottom.
Educational reference. This page explains how an indicator is built and how it is commonly read. It is not investment advice, not a recommendation and not a signal service. No indicator is profitable on its own — each is a way of describing a market, and any rule built on one has to be tested with realistic costs before it is traded.