Parabolic Time/Price

The Parabolic Time/Price System is a trading system that calculates stop and reverse values as a function of price and time. When a position is initiated, the stop is set at a price above or below current action based on previous price swings. The stop is then moved in the direction of price activity based on an accelerator formula. This allows a new trend to become established without stopping out correct positions due to the normal volatility associated with changes in trend.

When the price action turns and hits the trailing Parabolics stop, the position is reversed and a new stop is calculated. The point at which the position is reversed is called a stop and reverse (SAR). The Parabolic System is always long or short, never neutral.

The initial SAR (stop and reverse point) is set at the extreme price of the previous trend. After the initial SAR is set, the next interval's SAR is adjusted in the direction of the trend by the distance between the high for the new trend and the previous SAR then multiplied by an acceleration factor. The acceleration factor starts at .02 and increases by .02 to a maximum of .20 each period the market makes a new high/low for the move.

Interpretation

Parabolics employ trailing stops that are initially set loosely and then tightened exponentially. This exponential smoothing factor causes the stop points to take on a parabolic shape as they get closer to the price action. Having a maximum acceleration factor ensures that the SAR is not so tight that normal market wiggles (volatility) cause false signals.

Users of this system often use a trend identifying tool, such as the Directional Movement Index, in conjunction. More conservative users may simply wait for confirming signals of a change in trend, such as trend breaks and reversal patterns, before applying Parabolics to their work.

Sample Chart:

(Source: Tips on Technicals; Barchart.com)