When should you buy or sell using Parabolic SAR?

The Parabolic SAR helps identify trend reversals, with dots below price signaling uptrends and above signaling downtrends, best used with confirmation from volume and other indicators.

Aug 05, 2025 at 09:49 am

Understanding the Parabolic SAR Indicator

The Parabolic SAR (Stop and Reverse) is a technical analysis tool developed by J. Welles Wilder Jr. It appears as a series of dots placed either above or below the price chart of an asset. When the dots are below the price, it signals an uptrend and suggests a bullish market condition. Conversely, when the dots are above the price, it indicates a downtrend and implies bearish momentum. The primary function of the Parabolic SAR is to identify potential reversals in price direction, making it useful for determining entry and exit points.

This indicator works best in trending markets, where price movement shows consistent direction over time. In sideways or choppy markets, the Parabolic SAR may generate false signals due to frequent reversals. Traders often combine it with other indicators such as moving averages or Relative Strength Index (RSI) to confirm signals and reduce noise. The calculation of Parabolic SAR involves an acceleration factor and an extreme point, which adjusts as the trend progresses, causing the dots to move closer to the price and tighten the stop-loss level.

Buying Signals with Parabolic SAR

A buy signal is generated when the Parabolic SAR dots flip from above the price to below it. This shift indicates that the downtrend may be ending and an uptrend could be beginning. The moment the dot appears beneath the current candle or bar, it serves as a potential entry point for long positions.

• Confirm the dot has clearly moved below the lowest price of the most recent candle
• Ensure the price is making higher highs and higher lows, confirming trend direction
• Check volume levels to see if buying pressure is increasing
• Use additional confirmation from moving average crossovers, such as the 50-period crossing above the 200-period

Entering a trade immediately after the flip may lead to early entries during volatile swings. Some traders wait for the next candle to close above the SAR dot to reduce the risk of false signals. This confirmation step helps filter out whipsaws in ranging markets.

Selling or Shorting Signals with Parabolic SAR

A sell or short signal occurs when the Parabolic SAR dots transition from below the price to above it. This reversal suggests that the upward momentum is weakening and a downward trend may begin. The dot appearing above the price acts as a trigger for closing long positions or initiating short trades.

• Observe that the dot is positioned above the highest price of the recent candle
• Confirm the price is forming lower highs and lower lows
• Look for increased selling volume to support the bearish move
• Cross-verify with trendline breaks or bearish candlestick patterns like shooting stars or engulfing patterns

For short sellers, the placement of the SAR above price offers a dynamic stop-loss level that moves downward as the downtrend progresses. Traders may choose to exit the short position when the price moves back above the SAR dots, signaling a potential reversal.

Adjusting the Acceleration Factor for Precision

The default settings for Parabolic SAR use an acceleration factor (AF) starting at 0.02, increasing by 0.02 each time a new extreme point is reached, up to a maximum of 0.20. Adjusting these parameters can fine-tune the sensitivity of the indicator.

• To reduce false signals in volatile markets, increase the initial AF to 0.03 or 0.04
• Lower the maximum AF to 0.10 or 0.15 to prevent the SAR from catching up too quickly to price
• Test different settings on historical data using backtesting tools in platforms like TradingView or MetaTrader

A higher acceleration factor makes the SAR more responsive, generating earlier signals but increasing the risk of premature entries. A lower setting creates a lagging effect, which may miss initial trend moves but improves reliability. Traders should optimize these values based on the asset’s volatility and their risk tolerance.

Using Parabolic SAR with Other Indicators

Relying solely on Parabolic SAR can lead to misleading signals, especially in non-trending conditions. Combining it with complementary tools enhances decision-making accuracy.

• Pair with the ADX (Average Directional Index) to confirm trend strength; readings above 25 suggest a strong trend suitable for SAR signals
• Use MACD (Moving Average Convergence Divergence) to validate momentum shifts when SAR flips occur
• Apply support and resistance levels to assess whether the SAR signal aligns with key price zones
• Overlay Bollinger Bands to detect overextended price moves that may precede reversals

For example, if the SAR flips below price near a known support level and MACD shows bullish crossover, the combined evidence strengthens the buy case. Conversely, a SAR flip above price at a resistance zone with bearish RSI divergence increases the likelihood of a valid sell signal.

Practical Example: Trading BTC/USDT with Parabolic SAR

Consider a scenario on the BTC/USDT 4-hour chart. The price has been declining, with SAR dots above the candles. After several days, Bitcoin forms a bullish engulfing candle, and the SAR dot appears below the low of that candle.

• The trader waits for the next 4-hour candle to close above the SAR dot
• Volume increases by 30% compared to the previous three candles
• The 50 EMA crosses above the 200 EMA, confirming a golden cross
• ADX rises to 28, indicating strengthening trend

The trader enters a long position at the close of the confirmation candle. A stop-loss is placed just below the current SAR value. As the price ascends, the SAR trails upward, adjusting the stop-loss dynamically. When the SAR dots eventually appear above a candle’s high, the position is exited.

Frequently Asked Questions

Can Parabolic SAR be used on all timeframes?

Yes, the Parabolic SAR is applicable across all timeframes—from 1-minute charts to weekly charts. However, signals on higher timeframes (4-hour, daily) tend to be more reliable due to reduced market noise. On lower timeframes, the indicator may produce frequent reversals, increasing the risk of false entries.

What should I do if the SAR keeps flipping back and forth?

Frequent flipping typically occurs in ranging or consolidating markets. In such cases, consider pausing SAR-based trading or switching to range-bound strategies. Use tools like Bollinger Bands or Stochastic RSI to identify overbought or oversold conditions instead.

Is Parabolic SAR suitable for scalping?

It can be used for scalping, but only with adjusted settings. Set a higher initial acceleration factor (e.g., 0.04) and a shorter maximum (e.g., 0.10) to make the indicator more responsive. Combine it with volume profile and order flow data to improve timing accuracy on short-term charts.

How do I set up Parabolic SAR on TradingView?

Open the chart, click “Indicators” at the top, search for “Parabolic SAR,” and add it. Click the settings icon to adjust step (initial AF) and maximum (max AF). You can also change the dot color and size for better visibility. Save the template for future use.