What is the 'Parabolic Indicator'

The parabolic indicator, developed by J. Wells Wilder, is used by traders to determine a trend’s future direction. The indicator uses a trailing stop and reverse method called "SAR," or stop-and-reversal, to identify suitable exit and entry points. Traders also refer to the indicator as the parabolic stop and reverse (PSAR).

The parabolic indicator appears on a chart as a series of dots, placed either above or below a security's price, depending on the security's direction. A dot is placed below the price when it is trending upward, and above the price when it is trending downward.

Example of the Parabolic Indicator

Image depicting the parabolic indicator.

BREAKING DOWN 'Parabolic Indicator'

The parabolic indicator generates buy or sell signals when the position of the dots moves from one side of the security's price to the other. For example, a buy signal occurs when the dots move from above the price to below the price, while a sell signal occurs when the dots move from below the price to above the price. Traders also use the PSAR dots to set trailing stop-loss orders.

Calculating the Parabolic Indicator

EP = The highest high in the current uptrend, or the lowest low in the current downtrend.

AF = Starts with a default of 0.02 and increases by 0.02 each time a new EP occurs; maximum of 0.20.

Rising Parabolic SAR = Previous SAR + Previous AF (Previous EP – Previous SAR) = Current SAR

Falling Parabolic SAR = Previous SAR – Previous AF (Previous SAR – Previous EP) = Current SAR

Charting software automatically calculates the PSAR, which means traders only need to know how to interpret the indicator’s signals.

Trading with the Parabolic Indicator

The parabolic indicator generates a new signal each time it moves to the opposite side of a security’s price. This ensures a position in the market always, which makes the indicator appealing to active traders. The indicator works most effectively in trending markets where large price moves allow traders to capture significant gains. When a security’s price is range-bound, the signals generated by the indicator may not produce enough profits to cover commission costs.

For best results, traders should use the parabolic indicator with other technical indicators that indicate whether a market is trending or not, such as the average directional index (ADX), a moving average or trendline. For example, traders might confirm a PSAR buy signal with an ADX reading above 30 and/or a break above a long-term downtrend line. (To learn more, see: How is the Parabolic Indicator Used in Trading?)

  1. Average Directional Index - ADX

    The average directional index (ADX) is an indicator of objective ...
  2. Special Administrative Region - ...

    A Special Administrative Region is a relatively autonomous region ...
  3. Negative Directional Indicator ...

    A negative directional indicator is a component of the average ...
  4. Lagging Indicator

    A lagging indicator is an economic factor that trails macro changes ...
  5. Wilder's DMI (ADX)

    Wilder’s DMI (ADX) consists of three indicators that measure ...
  6. Indicator

    Indicators are statistics used to measure current conditions ...
Related Articles
  1. Trading

    Introduction to the Parabolic SAR

    Learn how to use the parabolic SAR indicator to generate trade signals and aid in stop-loss placement.
  2. Trading

    Parabolic SAR Buy Signals in Beaten Down Stocks (ABBV, CVX)

    These four stocks recently flashed a Parabolic SAR buy signal after declining for some time. Should you be looking for more upside?
  3. Trading

    Parabolic SAR Buy Signals

    The Parabolic SAR indicator is flashing "buy" in these four diverse stocks. Not simply relying on one indicator though, I take a look at the overall technical outlook and determine which ones ...
  4. Trading

    Parabolic SAR Sell Signals

    Strong selling on October 8 sent major indexes below support indicating the downward correction is continuing. Parabolic SAR signals occured in these four stocks recently, signaling to take profits ...
  5. Investing

    Trailing-Stop Techniques

    The important decision to exit a position must be based on more than emotion if you want to be a disciplined trader.
  6. Trading

    Apple Stock Begins September in Inflating Parabolic Bubble

    Apple is not cheap, with a P/E of 19.20 and dividend yield of 1.28%. The stock has momentum so strong that it's entered an "inflating parabolic bubble."
  7. Trading

    Facebook Reports With 'Inflating Parabolic Bubble'

    Facebook has an elevated P/E ratio of 34.89, and the stock has been in an "inflating parabolic bubble" since the end of June.
  8. Trading

    Salesforce Stock Momentum Is Above the Cloud

    Shares of Salesforce trade on pure momentum, and its stochastic reading is in parabolic territory.
  1. What are the top technical indicators used for range-bound trading strategies?

    Learn how to identify when a market is range-bound and what some of the technical indicators are that work best for trading ... Read Answer >>
  2. What common strategy do traders implement when using the money flow indicator?

    Learn a common trading strategy traders implement with the money flow indicator to identify profitable trade entry and exit ... Read Answer >>
  3. What indicators help define a bull market?

    Learn about a number of various technical indicators traders and analysts use to define and confirm the existence of a bull ... Read Answer >>
  4. How is the Average Directional Index (ADX) calculated, and what is the formula?

    Learn about average directional index (ADX) and its indicators, including the calculations for various elements of the ADX ... Read Answer >>
  5. Which indicators best complement the Exponential Moving Average (EMA)?

    Utilize additional technical indicators to complement and improve a basic trading strategy that relies on exponential moving ... Read Answer >>
Trading Center