Parabolic (PARAB)
Technical Studies - 30 March 2006

J. Welles Wilder's parabolic time/price is a simple study to use. The study continuously computes "top and reverse" price points. Whenever the market penetrates this "stop and reverse" point, you liquidate your current position and take the opposite position. If long, you liquidate the long position and establish a short position. If short, you liquidate the short position and establish a long position. The parabolic time/price study always has you in the market.

While the calculations to derive the "stop and reverse" price are quite tedious, the concept of the study is a model of simplicity. If the trading adage, "The trend is your friend," has merit, this study is the mathematical expression of that adage. Once you initiate a position, the parabolic time/price study gives the market time to move in your favor. If the market does not move in your favor, you need to stop and reverse your position. This study always has a market position.

Wilder defines the "stop and reverse" price as the SAR. The value of the SAR is a function of both time and price. When you enter a position, either long or short, the SAR value moves slowly during the first few trading intervals. This allows the market to work in your favor. But as time progresses, the SAR is either hit, or it follows the market direction in your favor. Remember, the SAR price never reverses. It moves higher or lower with the market and always in the direction of your market position. It is an automatic trailing stop.

When the market trades or touches the SAR value, you stop and reverse your position. This study works best in a trending market. You can imagine the severe whiplash that develops in a choppy, sideways market. In fact, Wilder recommends using this study in conjunction with the Directional Movement Index. The DMI helps you to determine the predominant trend of the market, and it assists you in trading the market from that side only. For a complete discussion, please refer to Wilder's book, New Concepts in Technical Trading Systems.

The parabolic time/price study uses three values in the computations. These values affect the acceleration factor described in the computation section. They are the initial acceleration factor, the addition factor, and the acceleration factor limit. Wilder used the values of .02,.02, and .20, respectively.

You may want to change these factors for different markets. If you do, you specify the new values in thousandths. For example, Wilder's value for the initial acceleration factor is .02 or 20/1000. On your monitor, this value displays as 20. To change it to .03, you type the value 30 which FutureSource translates to 30/1000. You are encouraged to experiment with these values for the same market or for several different markets.

Parameters

Initial - the initial acceleration factor, in 1/1000.
Addition - the additional acceleration factor, in 1/1000.
Limit - the acceleration factor limit, in 1/1000.

Information provided by FutureSource