The Parabolic SAR (Stop and Reverse) indicator plots a series of dots above or below price, showing the presumed trend direction and a potential level for a protective stop. The indicator's name reflects its purpose — not just identifying a trend, but hinting at the moment to reverse a position.
How SAR dots are plotted
Parabolic SAR dots are built from a formula factoring in the indicator's previous value, the current price extreme, and an acceleration factor that increases with each new period of the trend. During an uptrend, dots sit below price and gradually move closer to it; during a downtrend, they sit above price with the same convergence.
The signal when dots flip sides
The indicator's main signal is dots flipping from one side of the chart to the other. When SAR dots move from above price to below it, that's read as a buy signal: the trend has presumably shifted from down to up. A flip the other way is read as a sell signal.
The acceleration factor and its effect on signals
The acceleration factor determines how quickly SAR dots approach price as the trend develops. A higher factor makes the indicator more sensitive, giving earlier reversal signals, but also raising the number of false triggers from temporary pullbacks within a stable trend.
Limitations of Parabolic SAR in a ranging market
The indicator's main limitation is poor performance during sideways movement: in a range, SAR dots keep flipping from one side of the chart to the other, creating many false reversal signals with no real change in direction. Before using Parabolic SAR, it's recommended to check the current market regime with a trend-strength indicator, described in the article on the ADX indicator.
Parabolic SAR as a position-protection level
Besides reversal signals, the position of SAR dots can serve as a risk-management reference: the distance between price and the nearest SAR dot shows current volatility and can guide adjustments to the stake size of the next trade.
Combining Parabolic SAR with other indicators
To reduce false signals in a range, Parabolic SAR is often paired with trend filters. A good addition is direction confirmation from the ADX indicator or the overall structure of highs and lows, described in the article on the trend-following strategy.
Automating Parabolic SAR calculation
Calculating SAR dot positions and detecting when they flip to the other side of the chart is easy to automate. A trading robot for Pocket Option can track Parabolic SAR signals combined with a market-regime filter — details on the features page.
Conclusion
The Parabolic SAR indicator gives a clear visual signal of a trend change and a potential level for risk management, but performs poorly in a ranging market. Check trend strength before using the indicator and combine it with additional direction filters. Automatic calculation is available in the robot's plans.