Parabolic SAR

A trend following indicator that plots one dot per period, above price while it reads the move as falling and below it while it reads the move as rising. The letters stand for stop and reverse, which describes the design exactly: the indicator is never neutral and never absent, it sits on one side or the other, and the moment price touches it the dot flips to the opposite side and the reading reverses with it.

Each new dot is the previous one moved a fraction of the way towards the most extreme price recorded since the current run began. That fraction, the acceleration factor, starts at a small step and rises by the same step every time a new extreme is set, up to a stated maximum. The consequence is the shape the name refers to: while a move keeps extending the trail closes on price faster and faster, so a long run ends with the dots almost touching the bars. The step and the maximum are the whole of its configuration, and they change the output far more than most readers expect.

The limitation is structural rather than a matter of tuning. The calculation is defined by reference to an existing run, so in a sideways range it flips back and forth, and each flip is a signal by its own construction. The flip also arrives after the turn rather than at it, because the level is derived from an extreme that has already been recorded. Its author paired it with a separate measure of trend strength for that reason, and that pairing is now the common convention rather than a settled finding: practitioners disagree about whether the indicator is better read as a trailing exit level than as an entry signal at all.