Applying the Parabolic SAR and the SuperTrend for a Super Strategy
What if We Apply the Parabolic SAR and the SuperTrend at the Same Time?
This article will discuss a simple trading strategy where you will combine two famous technical indicators, the parabolic SAR and the SuperTrend indicator for enhanced trend detection mechanisms. First, let’s discuss both indicators in detail.
The Parabolic SAR in a Nutshell
The parabolic SAR was introduced by J. Welles Wilder Jr. in 1978, alongside other iconic indicators like the RSI. SAR stands for “Stop and Reverse.” It is primarily designed as a trend-following indicator that also acts as a trailing stop mechanism. Its dual nature makes it a favorite among systematic traders and algorithm designers.
The intuition is simple: in a rising market, price tends to move upwards in a curved, parabolic trajectory. The same is true in reverse for downtrends. Wilder believed that if one could model a price parabola that hugged the trend — tightening as the trend matured — then one could capture the trend's strength while maintaining protective stop levels.
In essence, the parabolic SAR doesn't just aim to follow price; it locks in profits as trends mature, and flips direction when a reversal is statistically likely, hence the “stop and reverse” feature. We’ll break the formula into logical steps, assuming the indicator is being used in an uptrend. The reverse applies symmetrically in a downtrend.
For each time step t, the SAR is calculated as:
Where:
SAR is the current SAR value
α is the acceleration factor (AF), which starts at a base value (usually 0.02) and increases incrementally (e.g., by 0.02) each time a new extreme point is recorded
EP is the extreme point: the highest high of the current uptrend (or lowest low in a downtrend)
The AF is dynamic. It begins at a minimum (e.g., 0.02), and increases by a step (e.g., 0.02) each time a new extreme point (EP) is set. This causes the SAR to accelerate toward price as the trend progresses. However, it’s capped at a maximum value (typically 0.20) to prevent it from getting too tight and prematurely stopping the trend.
The idea is to give the indicator flexibility in early trends, and tightness near maturity, thus locking in profits. The SAR behaves differently depending on whether the market is in an uptrend or downtrend:
In an uptrend, the SAR value rises each period and is plotted below the price.
In a downtrend, it falls each period and is plotted above the price.
Once the SAR value crosses (or is exceeded by) the actual price, the trend flips. This triggers a stop and reverse:
The trend direction reverses.
The SAR “jumps” to the prior EP.
The AF is reset to its base value.
A new EP begins to track in the opposite direction.
This is the heart of the parabolic SAR — not just to indicate trend, but to signal when to exit a position and potentially enter in the opposite direction. To prevent SAR from violating the last two bars’ price action (which would result in false flips), Wilder added bounds:
In an uptrend, the SAR for the next period cannot be greater than the lowest price of the previous two bars.
In a downtrend, the SAR for the next period cannot be less than the highest price of the previous two bars.
This safeguard ensures that the SAR respects recent price structure and doesn’t prematurely flip due to sudden price spikes. Let’s simulate what happens in a real uptrend:
SAR starts just below the price.
Each new high pushes the EP higher, incrementing the AF.
SAR creeps up toward price faster and faster.
Eventually, the price dips below the rising SAR — triggering a reversal.
SAR flips to above price, EP becomes the recent low, AF resets.
The new SAR starts dropping — now on the short side.
This back-and-forth makes the SAR ideal for systematic trading systems — it gives a trend direction, a trailing stop, and a clear reversal entry point.
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The SuperTrend in a Nutshell
The SuperTrend indicator is a popular trend-following technical indicator used by traders to identify the direction of the market and generate buy or sell signals. It’s built on two key components: average true range (ATR) and a multiplier.
The ATR is a technical indicator developed by J. Welles Wilder Jr., first introduced in his 1978 book. Wilder created the ATR to analyze commodity markets, which often had high volatility and frequent gaps. The goal was to build a more accurate picture of daily price movement than simply looking at the high-low range. The ATR solves this by factoring in gaps and limit moves that can distort traditional volatility measurements. The first step is calculating the true range (TR). It’s the greatest of:
Current high minus current low.
Absolute value of current high minus previous close.
Absolute value of current low minus previous close.
This catches gaps and sudden jumps that a high-low range would miss. Once you have the true range values over a set period (commonly 14 days), you average them to get the ATR.
At its core, the SuperTrend indicator creates a trend line that either sits below price (in an uptrend) or above price (in a downtrend). This line shifts when there's a reversal based on price crossing a threshold calculated from volatility. The SuperTrend "flips" when the closing price crosses the bands.
Combining Both Indicators
Combining both these indicators is a breath of fresh air. It’s actually quite simple. We only need to see the following:
For a bullish signal, the market is above the PSAR and above the SuperTrend line.
For a bearish signal, the market is below the PSAR and below the SuperTrend line.
The following chart shows a few signals generated by the strategy.
The following chart shows how signals can be easily found. All it takes is a confirmation from either indicator.
It’s preferred for the SuperTrend to not be flat as that implies market choppiness and a ranging configuration. The following chart shows the signal in the middle that was invalidated due to stabilization. Notice how the SuperTrend is flat.
Choppy markets are the main enemy of this technique. Take a look at the following chart.
It seems like at every signal, it’s too late. When we notice choppiness like this, it’s better to switch to contrarian strategy as opposed to a trend following one.
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