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Technical analysis

Parabolic SAR

By Jarosław Wasiński • Published: • Updated:
A recursive Welles Wilder indicator plotting SAR points from a directional extreme and acceleration factor. It can define reversal or stop-trailing rules. Dots are neither orders themselves nor certain forecasts. Parameters, constraints and initialisation need checking; oscillating prices can cause repeated state changes.
Example. With previous SAR = 1.1000, upward-state extreme point EP = 1.1100 and AF = 0.02, the basic update gives 1.1002. This is before implementation-specific constraints and reversal rules. Changing AF changes the dots’ path, not the execution mechanics of a stop order.

Recursion and extreme point

The basic step is SAR = previous SAR + AF × (EP − previous SAR). EP tracks the current direction’s extreme; AF commonly increases by a step at a new extreme up to a configured maximum. Implementations also specify previous-price constraints, reversal timing and initialisation. The base equation alone is not the complete algorithm.

Indicator versus order

A dot is not a submitted stop-loss. Using it in an order requires timing, Bid/Ask side, minimum-distance and price-step rules. A stop can fill with slippage. A SAR flip describes a change in indicator state, rather than a certain start of a new trend or guaranteed reversal price.

Whipsaw and evaluation

Oscillating prices can repeatedly switch a reversal algorithm’s side and create trading costs. That does not prohibit every non-trend use of SAR. An ADX filter or other condition creates a variant to test, not a guaranteed improvement. Compare executed trades and net results, rather than the smoothness of retrospectively selected dots.

FAQ

Does a SAR dot itself close a position?
No. A linked order or execution procedure must exist.
Are 0.02/0.2 universally best settings?
They are a popular convention, not an optimum for every instrument and interval.

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Jarosław Wasiński

Editor-in-chief, ForexMechanics.com • Macro & FX analyst

Independent analyst and practitioner with over 20 years of experience in financial markets. Actively involved in Forex since 2007, with a focus on fundamental analysis, OTC market structure, and disciplined capital risk management.

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