Parabolic SAR was developed by J. Welles Wilder, who also built RSI and ATR. It places a series of dots on the chart — below the price in an uptrend, above the price in a downtrend. The dots act as a dynamic trailing stop: the further the trend runs, the closer the dots creep toward price.

The "parabolic" refers to the curved path the dots trace as they accelerate. Each period, the gap between the dots and the price closes by a factor called the acceleration factor (AF). The AF starts at 0.02 and increases by 0.02 each time price makes a new extreme, up to a maximum of 0.20. Early in a trend, the dots are far from price, giving it room to move. Late in a trend, as momentum builds, the dots tighten up.

When price crosses the dots — when a downtrend's price pushes above the SAR level, or an uptrend's price falls below it — the indicator reverses. The dots jump to the other side and start fresh. This is the "stop and reverse": the current trend has ended, and the opposite may be beginning. In strong, clean trends, SAR works well as a trailing stop line. In choppy, sideways conditions, it reverses constantly and generates noise.