Short answer: the parabolic SAR is a trend-following trading indicator that plots one dot per bar, below price in an uptrend and above price in a downtrend. The dot works as a trailing stop that tightens as the trend ages. When price touches the dot, the indicator flips to the other side, which is where the name stop and reverse comes from. It is precise and mechanical, and it is also mostly useless in a sideways market, so the real skill is knowing when to switch it off.
This page is for traders on forex, index, metals and crypto CFDs who want a plain rule for the dots. Among technical analysis tools it is unusual because its trading signals carry no ambiguity about where the stop sits.
How the dots are calculated
The indicator uses two inputs. The first is the extreme point: the highest high since the current uptrend began, or the lowest low in a downtrend. The second is the acceleration factor. It starts at 0.02, grows by 0.02 each time price sets a new extreme point, and stops at 0.20.
Each new dot is the previous dot plus the acceleration factor multiplied by the gap between the extreme point and the previous dot. Take a long trade on EUR/USD where the last dot sits at 1.0900 and the extreme point is 1.1000. With the factor at 0.02, the next dot lands at 1.0902. After five new highs the factor is 0.12, and the same gap moves the dot to 1.0912. That is the parabola: the dot crawls at first, then closes the distance faster as the trend keeps rewarding it.
Two housekeeping rules matter. In an uptrend the dot may never sit above the low of the previous two bars, so its value cannot jump into yesterday's candle. Once a bar trades through the dot, the indicator reverses and the factor resets to 0.02.
Choosing settings for different market conditions
The defaults, a 0.02 step and a 0.20 cap, were tuned for daily commodity bars decades ago and are an unremarkable middle ground. Raise the step and the dots hug price sooner, which exits a fading move punctually but also flips you needlessly during ordinary pullbacks. Lower it and the dots lag, which is forgiving in a jittery market and costly in a sharp reversal.
| Setting (step, cap) | Behaviour | Where it tends to fit |
|---|---|---|
| 0.01, 0.10 | Sluggish, few reversals | Daily charts on gold or indices in a long, steady trend |
| 0.02, 0.20 | Standard | Four-hour and daily charts on major forex pairs |
| 0.03, 0.30 | Skittish, frequent flips | Short intraday holds on liquid pairs, only with a filter |
| 0.02, 0.10 | Standard start, early ceiling | Crypto CFDs, where late-trend spikes are violently large |
A quick calibration: count the flips over the last 100 bars. Roughly one reversal every 15 to 30 bars means the setting matches the instrument's rhythm. Five flips in 20 bars means the market is ranging or the step is too coarse, and either way the dots are not worth trading.
Strategy options: three ways to trade the dots
- Trailing exit only. Enter on your own setup and let the dot manage the stop, which is the most honest use of the tool. Our guide to trailing stop loss orders covers how a ratcheting exit behaves in general; the SAR dot is that idea with a built-in acceleration schedule.
- Reversal entries with a trend filter. Take a flip only in the direction of a higher-timeframe trend. If the daily 50-period average is rising, act on bullish flips on the hourly chart and ignore bearish ones. This halves the trade count and removes most of the whipsaw.
- Volatility gate. Compare the distance between price and the dot with the current ATR reading. When that distance is under one ATR, the stop sits inside normal noise and the next flip is likely to be random. Stand aside until the trend rebuilds some room.
These three trading strategies share one assumption: something else decides the direction. Each fits inside a broader trend following plan, because on its own the indicator scarcely distinguishes a trend from a lumpy range.
Common mistakes and limitations
- Trading every flip. In a range the dots reverse every few bars, and each exit carries a cost in spread and commission. Ten flips at two pips of spread on a one-lot position is 200 dollars of pure friction before any market move.
- Treating the dot as a target. It is a stop, not a destination. Traders who wait for the flip to close a winner often give back a third of the move. The dot only catches up once the extreme point stalls.
- Ignoring news. A scheduled release can push price through the dot and back within one bar, leaving you short in an uptrend. Around known events, widen the stop by hand or flatten.
- Assuming the parabola is symmetric. The factor resets on each reversal, so the first bars after a flip carry a wide, stubbornly slow stop and a lopsided risk.
Put plainly, the tool is unforgiving when a trend decelerates gradually and generous when it ends abruptly. That is the reverse of what most people expect, and it is why the volatility gate earns its keep.
A worked trade on a 10,000 account
Suppose you trade gold CFDs on a four-hour chart with a 10,000 account, risking 1 percent, or 100, per trade. Price flips bullish at 2,300 and the first dot sits at 2,270, a gap of 30. A 100 budget divided by 30 gives roughly 3.3 ounces, so you take 3 ounces.
Over the next 12 bars gold climbs to 2,380. The factor has stepped up to 0.14 and the dot has crept to about 2,352. Your open profit is 240, and the worst case if the dot is hit is a gain of 156. Price then stalls for four bars. The factor stops growing, but the dot keeps closing the gap and reaches about 2,362. On the fifth bar gold dips through it, the trade exits near 2,362 for a gain of 186, and a bearish dot appears at 2,380.
Whether to take that short is the real decision. The daily trend is still up, so the trend filter says skip it. Results vary, but in my experience skipped counter-trend flips are where most of an account's health is preserved.
Where the dots meet evaluation limits
A prop-firm evaluation adds two constraints the indicator knows nothing about: a daily loss limit and a total drawdown ceiling. Flip-heavy SAR behaviour in a range quietly drains a daily budget: six losses of 80 each are 480 gone before lunch, and the seventh trade is the one that would have run.
Pivex uses a total drawdown that holds still and a daily allowance that renews at each open, with no clock on the attempt and no minimum day count on its one-step evaluation. That structure rewards patience over activity, so a cap of two SAR flips per instrument per day is a sensible add-on. The built-in assistant on Match-Trader tracks your limits while you trade, but the decision to stop flipping is still yours.
Your next move is simple: open a four-hour chart on the instrument you trade most, apply the defaults, and mark every flip over the last 200 bars. Note which flips agreed with the daily trend. That one exercise shows whether the dots deserve a place in your plan, and on a Pivex evaluation it shows how many flips your daily budget can absorb.
Related guides: trailing stop loss orders and trend following.
Before participating, review Pivex's current program rules and decide whether a simulated proprietary trading evaluation fits your experience and risk limits. Participation does not guarantee a reward, income, or any particular trading result.