Definition
Parabolic SAR
Parabolic SAR plots dots above or below price to signal trend direction and trailing stop levels.
The Stop and Reverse indicator places dots below price in an uptrend (acting as a trailing stop) and above price in a downtrend. When price crosses the dots, the SAR flips to the other side, signalling a potential trend reversal and a new trailing-stop level.
Indian traders use Parabolic SAR on Nifty, Bank Nifty, and stocks to trail stops in trending moves and to flag reversals. It works well in strong trends but whipsaws badly in sideways markets, so it is best combined with a trend filter like ADX or moving averages.
Related terms
- ADXADX (Average Directional Index) measures the strength of a trend, regardless of its direction.
- SupertrendSupertrend is a trend-following indicator that plots a line below price in uptrends and above price in downtrends, using ATR.
- TrendlineA trendline is a straight line connecting a series of highs or lows to visualise the direction and slope of a trend.
- Stop LossA stop loss is a pre-set order that triggers an automatic sell (or buy, for shorts) once a security hits a chosen price, capping your loss without you having to watch the screen.
Plain-English explainer from The Dispatch Investors Encyclopedia. General information, not financial advice.