Parabolic SAR: Trend-Following Stop System
The Parabolic SAR dots trail price and provide dynamic stop-loss levels. Learn how to use this trend-following indicator in CFD trading. Trend-following stops.
What Is Parabolic SAR?
Developed by J. Welles Wilder (also creator of RSI and ATR), the Parabolic Stop and Reverse (SAR) places dots above or below price to indicate trend direction. When dots are below price, the trend is up. When dots flip above price, the trend has reversed.
How It Works
The SAR accelerates as the trend extends. Each bar, the dot moves closer to price by an acceleration factor (AF), typically starting at 0.02 and increasing by 0.02 per new extreme, up to a max of 0.20.
This means the longer the trend runs, the tighter the stop becomes — locking in profits while giving the trend room to continue.
Using SAR in CFD Trading
The simplest system: Buy when dots flip below price, sell when dots flip above. Each flip is a stop-and-reverse signal — you exit the current position and enter the opposite.
However, this system whipsaws badly in ranging markets. The SAR was designed for trending markets. Always confirm trend with ADX or a moving average before using SAR signals.
Best Practices
- Use SAR on higher timeframes (4H, Daily) to reduce whipsaws
- Combine with ADX > 25 to filter for trending conditions
- Use SAR dots as trailing stops, not as entry signals alone
- Adjust the AF step: higher AF = tighter stops but more reversals; lower AF = looser stops but fewer reversals
Disclaimer: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 70-80% of retail investor accounts lose money when trading CFDs. Backtesting does not guarantee future results. Always consider whether you can afford the potential loss of your capital.