Parabolic SAR (Stop And Reverse) is a trend-following tool that plots a series of dots above or below price. The dots trail the trend and accelerate toward price over time; when price touches them, the system 'stops and reverses' — the dots flip to the other side, signalling a potential trend change.
How to read it
Dots below price mean an uptrend (the SAR is trailing as support); dots above mean a downtrend. The flip from one side to the other is the signal. Because the dots accelerate as the trend extends, SAR tightens the further a move runs — which makes it a natural trailing stop that locks in more of a trend the longer it lasts.
Strengths and weaknesses
SAR's strength is exits: as a mechanical trailing stop in a strong, smooth trend it is excellent, riding the move and getting you out near the turn. Its weakness is ranges — in choppy, sideways markets it flips constantly, generating a stream of false reversals and losses. Use it where it belongs: trailing a position once a trend is established, not generating fresh entries in chop.