Parabolic SAR¶

OVERVIEW¶

The Parabolic SAR (Stop and Reverse) is a price-derived trend indicator available in the Tapeboard market terminal. It plots a single dot below price during uptrends and above price during downtrends. When price crosses the dot, the indicator flips sides and signals a new trend direction.

J. Welles Wilder Jr. introduced the indicator in his 1978 book New Concepts in Technical Trading Systems, alongside RSI and Average True Range.

Note

Parabolic SAR is designed for trending markets. In sideways or choppy conditions it generates frequent false signals. Wilder recommended pairing it with ADX > 25 as a trend-strength filter.

HOW IT WORKS¶

Parabolic SAR updates each period using a recursive formula:

SAR(t+1) = SAR(t) + AF × (EP − SAR(t))

Variable	Description
SAR(t)	Current period's SAR value
EP (Extreme Point)	Highest high in an uptrend, or lowest low in a downtrend
AF (Acceleration Factor)	Starts at 0.02, increments by 0.02 on each new EP, capped at 0.20

Two built-in constraints:

SAR cannot move into the prior two periods' price range, preventing premature flips on inside bars.
When price crosses SAR, the indicator flips: SAR resets to the previous EP, AF resets to 0.02, and a new EP is established.

The "parabolic" name reflects the curve traced as AF accelerates — SAR converges on price along a parabolic arc, tightening the trailing stop as a trend matures.

FEATURES¶

Trailing Stop Placement¶

Parabolic SAR functions as a mechanical trailing stop. The acceleration factor naturally tightens the stop as a trend extends, locking in more profit on mature moves without manual adjustment.

Entry and Exit Signals¶

A dot-side flip is a discrete buy or sell trigger requiring no interpretation. The signal is binary — above price is bearish, below price is bullish.

ADX Integration¶

Tapeboard supports combining Parabolic SAR with the Directional Movement Index (DMI/ADX), following Wilder's original methodology: SAR provides the entry signal, ADX confirms trend strength.

Tip

Use ADX alongside Parabolic SAR. When ADX reads above 25, trend conditions favour SAR signals. Below 25, treat all SAR flips with caution.

HOW TO USE¶

Reading the Dots¶

Dot Position	Market Condition	Signal
Below price	Uptrend active	Bullish — hold or go long
Above price	Downtrend active	Bearish — hold or go short
Crosses price	Trend reversal	Flip — close current position, open opposite

Worked Example¶

After the TSLA earnings gap-down on January 24, 2024, SAR flipped above price at $208. Over a 21-trading-day downtrend, AF stepped from 0.02 to 0.16 as TSLA declined to a February 22 low of $191.59. On February 28, TSLA crossed SAR at $200.20 — the indicator flipped to $191.59 (the prior EP), AF reset to 0.02, and an uptrend signal triggered.

Traders using SAR as a trailing stop closed shorts at $200.20, locking in $7.80 per share from the original $208 entry.

Adjusting Default Settings¶

Wilder's default acceleration factor (0.02 step, 0.20 cap) was calibrated for 1970s commodity futures.

Market / Timeframe	Recommended AF Step	Notes
Equities — daily	0.02 (default)	Wilder's original setting
Equities — intraday	0.03–0.04	Reduces false flips on shorter timeframes
Crypto — intraday	0.03–0.05	Higher volatility warrants faster convergence