Parabolic SAR strategy

Why it works

Each period the SAR moves closer to price by an acceleration factor that starts at 0.02 and increases by 0.02 with every new extreme, up to 0.20. A long trend therefore gets a stop that tightens over time, locking in profit.

In a range, the SAR flips back and forth and produces many losses. That is why it works best as an exit tool or combined with a trend filter.

The rules

Setup

• Trend filter: price above the 200-period moving average for longs, below for shorts.
• Parabolic SAR with the standard 0.02 step and 0.20 maximum.

Entry

• Buy when the dots flip from above price to below price while the trend filter is bullish.

Stop loss

• The current SAR dot is the stop.

Exit and management

• Move the stop to the new dot every period.
• Exit when price touches the dot (the SAR flips).

Filters that improve it

• Ignore flips against the 200-period average.
• Avoid markets where the dots have flipped more than three times in the last 20 bars.

Worked example

Illustrative EUR/USD example on 1H: price is above the 200-period average at 1.0820. The dots flip below price at 1.0845. Buy at 1.0848 with the stop at the dot, 1.0828. Over the next ten hours the dots rise to 1.0880 and price touches them: the trade closes at 1.0880 for about 1.6R.

Illustrative numbers, not a recommendation.

Common mistakes

• Trading every flip in a sideways market.
• Raising the acceleration factor, which makes the stop too tight.

How to practise it

In Candlemind turn on the SMA 200 as the trend filter and trail your stop by hand under each new higher low, tightening it as the move accelerates: that is the logic of the SAR. Compare it with a fixed stop over 20 trades.

Pre-trade checklist

1. Price on the right side of the 200 average
2. SAR flipped in the trade direction
3. Stop at the current dot
4. Stop moved every period
5. Exit when the dot is touched

Frequently asked questions