Parabolic SAR
The Parabolic SAR (Stop and Reverse) is a technical indicator developed by J. Welles Wilder Jr. and published in his 1978 book that plots dots above or below price bars to indicate historical trend direction, using an acceleration factor that causes the indicator to move closer to price over time as a trend persists.
J. Welles Wilder Jr. introduced the Parabolic SAR in his 1978 book New Concepts in Technical Trading Systems, the same work that introduced the Relative Strength Index (RSI) and Average True Range (ATR). The term parabolic refers to the curved shape of the indicator dots when plotted over a sustained historical trend period, as the acceleration factor causes the dots to accelerate toward price. SAR stands for Stop and Reverse, reflecting the indicator's original design as a mechanism to trail a stop level that would reverse a position when price crossed it.
The calculation of the Parabolic SAR uses two variables: the Extreme Point (EP), which is the highest high (in an uptrend) or lowest low (in a downtrend) reached since the last reversal, and an Acceleration Factor (AF) that begins at 0.02 and increases by 0.02 each time a new extreme point is reached, up to a maximum of 0.20. Each period's SAR value is calculated by adding the AF multiplied by the difference between the EP and the prior SAR to the prior SAR value. When price crosses the SAR dot, the indicator reverses, and the process restarts on the opposite side.
Technical analysts who reference the Parabolic SAR in the historical literature note that the accelerating nature of the indicator was designed to reflect the historical observation that strong trending periods in price data are often characterized by progressively tighter price action relative to the trend's extreme points. The dots appearing below price in historical uptrends and above price in historical downtrends reflect this structural pattern in the historical record. No technical indicator including the Parabolic SAR provides reliable predictions of future market behavior.
The Parabolic SAR is available on major charting platforms and is one of several Wilder indicators that remain widely referenced in technical analysis education and practice. Its primary context of application has historically been in trending market environments, as the indicator can generate frequent reversals in historical sideways price environments.
The default Acceleration Factor settings (starting value of 0.02, increment of 0.02, maximum of 0.20) that Wilder specified in his original 1978 work remain the most common defaults in charting software, though practitioners adjust them based on the time frame and volatility characteristics of the securities being analyzed. A lower AF starting value and smaller increment will cause the SAR to trail price more loosely, producing fewer reversals in historical data; a higher AF will cause the SAR to close in on price more rapidly, producing more frequent reversals. These parameter trade-offs are part of the indicator's educational context and illustrate the broader principle that no single technical indicator setting is universally optimal.