What is Parabolic SAR in Forex?

Understanding Parabolic SAR in Forex

Parabolic SAR (Stop and Reverse) is a technical indicator developed by J. Welles Wilder to identify trend direction and provide potential entry and exit points. It appears as a series of dots plotted either above or below price on a chart. Dots below price indicate bullish momentum and potential long positions; dots above price signal bearish momentum and potential shorts. When dots flip from one side to the other, it suggests a trend reversal and potential trade exit or reversal signal.

How Parabolic SAR Works

The indicator calculates a trailing stop that accelerates as the trend progresses, hence the term "parabolic". As price moves in the trend direction, the dots move closer to price, tightening the protective stop. This acceleration continues until price eventually touches the dots, triggering a reversal signal. The SAR is most effective in trending markets where it keeps traders in positions during strong moves while quickly exiting when trends stall or reverse.

Strengths and Limitations

Parabolic SAR excels in trending markets, keeping traders positioned during strong directional moves and providing clear exit signals. However, it performs poorly in ranging or choppy markets, generating frequent false signals as price whipsaws through the dots. Combine Parabolic SAR with trend filters like moving averages or ATR to avoid trading during low-volatility consolidation periods.