<p>The <strong>Parabolic SAR</strong> (Stop and Reverse) is a technical indicator that places dots on a price chart to signal potential trend direction and to provide <a href="/NewSite/encyclopedia/trailing-stop/" class="ency-link">trailing stop</a>‑loss levels. Developed by J. Welles Wilder, the SAR (Systematic Action/Reverse) follows the price, accelerating as the trend strengthens and flipping to the opposite side when the price reverses, thus generating stop‑and‑reverse signals.</p>

<h2>How It Works</h2>
<p>The indicator is calculated each period using the extreme price (EP) – the highest high in an uptrend or the lowest low in a downtrend – and an acceleration factor (AF) that starts at a set value (commonly 0.02) and increases by a fixed increment (usually 0.02) each time a new EP is recorded, up to a maximum (often 0.20).</p>
<p>Formula for the SAR in an uptrend:</p>
<ul>
<li>SAR<sub>today</sub> = SAR<sub>yesterday</sub> + AF × (EP – SAR<sub>yesterday</sub>)</li>
</ul>
<p>For a downtrend the subtraction replaces the addition. When the price crosses the SAR dot, the indicator flips: the current EP becomes the worst price of the prior trend, the AF resets to its initial value, and the SAR starts plotting on the opposite side of the price.</p>
<p>Visually, a series of dots below the candles indicates an uptrend; dots above the candles signal a downtrend. The distance between the price and the SAR acts as a dynamic trailing stop.</p>

<h2>Why It Matters</h2>
<p>Traders use the Parabolic SAR to stay in a trend while protecting gains, because the indicator automatically tightens the stop as momentum builds. For example, in a strong bullish move, the SAR may start far below the price, allowing room for volatility, then creep upward each bar, locking in profit if the rally stalls. When the price finally pierces the SAR, the indicator reverses, alerting the trader to exit the long position and consider a short.</p>
<p>Its simplicity makes it accessible for intermediate traders, yet its reliance on price extremes means it works best in trending markets and can produce false signals during sideways or choppy conditions, prompting users to combine it with other tools such as the Average True Range (<a href="/NewSite/encyclopedia/atr/" class="ency-link">ATR</a>) for filtering.</p>