Stop and Reverse (SAR) Strategy: How to Use Parabolic SAR for Trading

Trend-following strategies form the backbone of many successful trading systems. One such method is the Stop and Reverse (SAR) strategy, a disciplined approach that allows traders to exit an existing position and immediately enter the opposite one when a trend reversal occurs.

The most popular tool used for implementing this strategy is the Parabolic SAR indicator, developed by J. Welles Wilder. It is widely used in equity, index, and derivatives trading because of its simplicity and ability to identify potential reversals.

In this article, we will explain what the stop and reverse trading strategy is, how the parabolic SAR strategy works, and how traders can apply it effectively in intraday and swing trading.

What is the Stop and Reverse (SAR) Strategy?

The stop and reverse trading strategy is a trend-following method where a trader:

• Exits a current position when the trend changes, and
• Simultaneously enters a new position in the opposite direction.

For example:

• If you are holding a long position and the indicator signals a trend reversal, you close the long trade and enter a short position.
• If you are short and the trend turns upward, you exit the short trade and initiate a long trade.

This strategy ensures that a trader is always aligned with the prevailing trend and reduces hesitation during reversals.

It is commonly used in trending markets and is suitable for:

• Intraday traders
• Swing traders
• Derivatives traders

Introduction to the Parabolic SAR Strategy

The Parabolic SAR strategy is built around the Parabolic SAR indicator. “SAR” stands for Stop and Reverse.

The indicator appears as a series of dots plotted either above or below the price on a chart.

Basic Interpretation

• Dots below the price → Indicates bullish trend → Consider long positions
• Dots above the price → Indicates bearish trend → Consider short positions

When the dots switch from below to above (or vice versa), it signals a potential reversal. That is where the stop and reverse concept comes into play.

The Parabolic SAR automatically trails price movement, tightening as the trend progresses. This makes it useful not just for entries but also for dynamic exit planning.

How the Stop and Reverse Strategy Works?

Let us break it down step by step.

Step 1: Identify the Prevailing Trend

Apply the Parabolic SAR indicator on your chart. Observe whether the dots are above or below the price.

• Dots below price → Uptrend
• Dots above price → Downtrend

Step 2: Enter the Trade

• In an uptrend, initiate a long position.
• In a downtrend, initiate a short position.

Step 3: Monitor for Reversal

When the dots shift position:

• If they move from below price to above price → Exit long and enter short.
• If they move from above price to below price → Exit short and enter long.

This automatic switching defines the stop and reverse trading strategy.

Step 4: Risk Management

Although SAR provides reversal signals, traders should still:

• Define position size properly
• Avoid excessive leverage
• Confirm signals in volatile conditions

Example: Intraday Application

Suppose a stock opens strong and Parabolic SAR dots appear below the price.

• You initiate a long trade.
• As price continues upward, SAR dots trail below.
• Mid-session, dots flip above the price.

This indicates the uptrend may be ending. You exit your long position and enter a short trade to capture the downside move.

Intraday traders use this method particularly in trending sessions where momentum sustains in one direction.

Example: Swing Trading Application

In swing trading, the timeframe may be daily charts.

• Dots below price for several days indicate an established uptrend.
• When dots flip above price, it may signal the beginning of a correction or new downtrend.

Swing traders use this reversal to lock in profits and potentially ride the next trend.

Benefits of Using the SAR Strategy

The stop and reverse trading strategy offers several advantages:

• Clear visual signals
• Removes emotional decision-making
• Works well in trending markets
• Suitable for both intraday and positional traders
• Automatically trails price, helping protect profits

For disciplined traders, SAR can create a systematic trading framework.

Limitations and Risks

No technical strategy is flawless. The parabolic SAR strategy has limitations:

• Performs poorly in sideways markets
• Generates false signals in choppy price action
• Can lead to multiple small losses in range-bound conditions

In low-volatility phases, SAR tends to flip frequently, causing whipsaws.

Therefore, it should not be used in isolation.

Practical Tips for Traders

To improve the effectiveness of the stop and reverse trading strategy:

1. Combine with Moving Averages

Use a 20-day or 50-day moving average to confirm trend direction before acting on SAR signals.

2. Use RSI for Confirmation

If SAR shows a bullish reversal and RSI is above 50, the signal carries more strength.

3. Adjust SAR Settings

The indicator has two key parameters:

• Step
• Maximum acceleration

Increasing step makes SAR more sensitive, suitable for intraday trading.
Lower settings help swing traders avoid false signals.

4. Backtest Before Deployment

Always test the parabolic SAR strategy on historical charts before committing real capital.

FAQs

1. What is the stop and reverse trading strategy?

It is a method where a trader exits a current position and immediately enters a reverse position when a trend reversal signal appears.

2. How do I use Parabolic SAR for intraday trading?

Apply the indicator on lower timeframes and follow dot reversals for entries and exits, preferably in trending sessions.

3. Is SAR effective in sideways markets?

No. SAR performs best in trending conditions and may generate frequent false signals in range-bound markets.

4. Can SAR be combined with other indicators?

Yes. Combining SAR with moving averages, RSI, or volume analysis improves reliability.

5. What are the key risks of using SAR strategy?

Whipsaws in choppy markets and overtrading during volatile phases.

Conclusion

The Stop and Reverse (SAR) strategy is a disciplined trend-following approach that helps traders stay aligned with market direction. The Parabolic SAR strategy provides clear visual signals, making it easy to implement across intraday and swing trading setups.

However, like all technical tools, SAR works best when combined with confirmation indicators and proper risk management. Traders should focus on market conditions, avoid sideways phases, and test the strategy thoroughly before live execution.

With the right application and disciplined execution, the stop and reverse trading strategy can become a structured part of a trader’s system rather than a standalone signal tool.