Understanding the Parabolic SAR Indicator in Forex

03 April 2025

The Parabolic SAR indicator is a popular tool among FX traders, mainly used to identify trends and potential reversals. It is a very powerful tool to illustrate where the price is going and makes it easier to see trends. Its concept is simple to understand: when the price is in an uptrend (goes higher), the Parabolic SAR follows with its points below the price. When we get a bearish or downtrend, then dots are painted above the price (candles). The indicator is equally useful for both beginners and pros, and we are going to explain how it works, how to calculate it, and how to apply it in FX trading.

What is a Parabolic SAR indicator?

Parabolic SAR indicator is a trend-following technical tool that is used in almost any financial market, including FX. The indicator is usually added to a chart and is included in almost every advanced trading platform. The main purpose of Parabolic SAR is to help traders spot the direction of a market trend and signal potential reversals. When dots switch sides, it might suggest that the trend is changing its direction or slowing down. The indicator offers clear entry and exit signals.

The indicator was designed by J. Welles Wilder Jr., who is a very well-known creator of many popular indicators. The indicator has the main goal of capturing the momentum of a price trend and responds to price changes dynamically. It places dots above or below the price, below when the price is trending up and below when the price is trending down. This simple yet effective method makes it suitable for beginners to learn to see trends and is recommended for beginner FX traders. As with any technical indicator, Parabolic SAR should also be used in conjunction with other indicators, as no single indicator can provide infallible signals. We will provide some trading tips below, but let's first explain the Parabolic SAR calculator.

The Parabolic Sar indicator formula explained

To understand how the indicator really works, we need to learn about its formula. The method of Parabolic SAR calculation is built on three main components:

Previous SAR Value - The last calculated SAR value.
Acceleration Factor (AF) - As the trend continues, AF increases and makes the indicator more responsive to price changes.
Extreme Point (EP) - The highest price in an uptrend or the lowest price in a downtrend.

Parabolic SAR indicator formula adjusts these components dynamically, which ensures that as the trend strengthens, the indicator becomes more sensitive to provide early signals for potential reversals. Knowing the details of the Parabolic SAR indicator calculation is important. The indicator follows price and is sensitive to reversals, which is key for traders who want to find early entries into trends or find entries into already established trends.

For example, in an uptrend, if the market reaches a new high, the EP is updated, and the SAR indicator is calculated accordingly. This process continues until the dots shift above the price, signaling a potential reversal.

The Parabolic Sar indicator significance in Forex

The Parabolic SAR indicator significance in Forex trading can not be overstated. It can play a critical role in FX trading strategy:

Spotting a trend reveals - The switch in the dot placement from below to above or vice versa often indicates that the current trend is either ending or we see a pullback, which can be used to enter on the continuation of the trend.
Risk management - Traders can use Parabolic SAR dots to set dynamic stop-loss levels, which can be effective in limiting losses and protecting their trading capital against sudden market reversals.
Perfect for entry and exit signals - Parabolic SAR offers clear visuals and makes it much easier to determine when to open or close positions, which is super useful for beginners who might struggle to gauge the market sentiment.

As a result, the indicator can be a powerful addition to a trader’s arsenal and serve as a valuable tool for both trend identification and risk management.

Key Parabolic Sar indicator Parameters you should know

Parameters are critical for technical indicators. Several parameters define how the Parabolic SAR operates, and when traders apply it to the chart, they can adjust settings such as step and maximum.

Step

This is the increment of AF, which increases each time a new extreme price (the highest high in an uptrend and the lowest low in a downtrend) is reached. Essentially, it controls how quickly the SAR moves closer to the price action as the trend strengthens. The default parameter is 0.02, and it is recommended to leave it as it is for beginners.

Maximum

The maximum setting defines the upper limit for the acceleration factor. By default, it is set at 0.2. Its main role is to prevent the SAR from accelerating too rapidly and ensure that even in strong trends, the indicator remains smooth and does not flip signals too quickly. So, for beginners, it is recommended to leave this setting untouched.

How to use Parabolic SAR in Forex trading

Integrating the Parabolic SAR into your FX trading strategy is a simple process. Traders have to interpret the markets using the dots. When the dots are below the price, it is mostly a bullish signal and can suggest a continuation of an uptrend. On the other hand, when the dots are above the price, they usually indicate a bearish trend. The best approach is to wait for the price to pullback (the dot reverses) and enter on the continuation when the dot switches back to support the main trend.

The best way to use the Parabolic SAR indicator is to combine it with other indicators. Moving averages or oscillators can provide additional confirmation and increase the likelihood of winners. Surely, setting the stop loss slightly below or above the SAR dots is a good practice to ensure the price can not easily take out your stops. Stop-loss is a must in trading as it helps traders to protect their capital and stay in the financial trading business in the long run.

Applying Parabolic SAR to the charts

All modern trading platforms, including MT4, MT5, cTrader, and TradingView, have Parabolic SAR built in. The MT4 and 5 platforms make it easy to use Parabolic SAR. Traders have to click on Insert, then Indicators, and finally Trend (Insert → Indicators → Trend). cTrader and TradingView also offer Parabolic SAR indicators. Trades can also select the color of the dots, which is very useful, enabling them to adjust the indicator to their preferences.

Simple Parabolic SAR trading strategy

As we have mentioned, Parabolic SAR is most effective in trending markets. So, we will always first try to determine if the market is in a trend. We use a 100-period Simple moving average to help us determine the main direction of the trend. It is also a very nice addition to Parabolic SAR as it helps us filter many false signals.

The principle is simple: only look for buy signals when the price is above 100 SMA, and only look for sell signals when the price is below 100 SMA. This way, we ensure to always follow the main trend and not get caught in pullbacks or sideways markets.

Buy signal - when the dot switches place and is above the price, and then it switches back below the newly formed candle, we take it as a buy signal. Price should be above the 100 SMA.
Sell signal - When the dot switches and is below the price, and then again switches and is painted above the price, we take it as a sell signal. The price should be below the 100 SMA.

This strategy is just a simple example of how SAR can be used in trading, and traders could add another indicator to the mix and then test the strategy on both historical and live price data on a demo account.

Pros and cons of the Parabolic SAR usage in FX

As with every technical indicator, Parabolic SAR also has its own pros and cons. The indicator is very useful in trending markets and can help traders to follow the trend and provide dynamic levels to place trailing stops. However, if you only use the Parabolic SAR indicator, then false signals are inevitable.

Parabolic SAR indicator pros

Clear visual signals - Parabolic SAR indicator offers straightforward buy and sell signals, which makes it very easy to follow.
Suitable for trending markets - It works very well in trending markets and can provide many useful signals to enter the market during continuation setups.
Dynamic stop-loss - The indicator provides traders ability to place stop-loss orders behind dots, which act as dynamic levels. The indicator has an evolving nature, which is effective for trailing stops.

Parabolic SAR indicator cons

Not for the sideways market - The indicator gives many false signals when the market is not trending and can make it difficult to find reliable signals. Better to combine with other indicators.
Lagging - Sometimes the indicator might lag, which can cause delays in recognizing trend changes, which is dangerous for beginners.

Overall, to use SAR effectively, traders should combine it with other indicators like ADX to define how strong the trend is and filter false trading signals generated by Parabolic SAR.

Trading tips to use the Parabolic SAR in your trading

These trading tips will help both beginners and professional traders to maximize the effectiveness of Parabolic SAR in their FX trading or any other markets.

Confirm with other indicators - Use tools to confirm Parabolic SAR signals. Useful indicators include moving averages, ADX, MACD, and other ones that can detect how strong the trend is or provide additional confirmation.
Adjust settings according to volatility (Only for pros!) - In highly volatile markets, traders can increase the AF to reduce lag, but false signals will also be increased in number. This tip is for more experienced traders, as beginners should avoid trading extremely volatile markets in the first place.
Backtest your SAR-based strategies - Before you apply anything in live environments, you must conduct a thorough backtest for all strategies, including Parabolic SAR strategies.
Stay flexible - There is no single indicator that is foolproof. It is always best practice to use the Parabolic SAR as a part of your trading strategy that provides additional visual confirmation of ongoing trends.

Revisiting Parabolic SAR parameters

Technical indicators are laggy in nature, and markets are evolving, meaning it is always a good idea to revisit your specific parameters for all indicators, including the Parabolic SAR indicator. As market conditions evolve, traders should be tweaking settings and backtesting their indicators to ensure their approach is up to date and aligns with the market dynamics. Fine-tuning the Acceleration Factor and Maximum AF will significantly impact your strategy’s performance.

Testing different settings

Changing settings on indicators such as Parabolic SAR parameters is always advised for experienced traders. Beginners should start with default settings, backtest their strategies, and when they have some experience on a demo account, they can change and test different settings as well. Experimenting with various parameter combinations in different market conditions can provide unique insights and make indicators more effective.

Learn from historical data

Using past trading data from your trading journal will greatly improve your understanding of how your strategy works and also provide information on how certain Parabolic SAR parameters can improve your trading performance.

Always try to improve

Since markets change and evolve over time, it is important to regularly re-check your strategy and update it based on performance feedback. Since AI and machine learning are becoming popular, the AI-powered Parabolic SAR indicator can improve your trading results and eliminate lagging factors from the indicator.

Key Takeaways

Parabolic SAR helps quickly spot trends by placing dots below prices in an uptrend and above prices in a downtrend.

The Parabolic SAR formula is dynamic, which uses the previous SAR value, the Acceleration Factor, and the Extreme Point to upgrade signals.

Main parabolic SAR parameters are user-adjustable, including the Step and Maximum.

The indicator provides clear entry and exit signals.

Parabolic SAR is best used in trending markets, and traders should combine it with other indicators.