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Parabolic

 

Parabolic Indicator Purpose


Parabolic is a trend following indicator developed by J. Welles Wilder that helps to generate buy and sell signals. It is intended to help traders understand trend direction, accept or reject them, decide trend end and fix on the possible exit points. The fundamental principle of Parabolic indicator can be described as “stop and reverse” (SAR). Parabolic SAR is also an effective technical tool for determining where to place stop loss orders.


Parabolic SAR Buy Signal

A buy signal is appeared when the price is next to above the upper Parabolic SAR. When the Parabolic SAR changes its position from being above price to below price, then the stock, futures, or currency trader should "stop" and choose the “buy” direction.


Parabolic SAR Sell Signal

A sell signal is appeared when the price is next to below the lower Parabolic SAR. When the Parabolic SAR changes from being below price to being above price, the trader should "stop" and sell to exit their existing long trade and choose the “sell” direction.



Parabolic Indicator Usage


When using the parabolic tool, so every trader should take into consideration its positioning vs. the price chart as well as its acceleration factor which rising together with the trend. Despite being one of the popular tools for Forex market analysis, it has restrictions and may give false signals in regularly changing market conditions.

Before explaining how Parabolic SAR is calculated, let’s take a look to some important basics:


Extreme Pointis the top price recorded during a long trade or the lowest price recorded during a short trade.


Significant Point is the top price reached in a long trade or the lowest price reached in a short trade. In addition, it is equal to the extreme point when a trade is closed.


Acceleration Factor starts at 2% for a new trade and increases by 2% on each day that a new extreme point is reached. The maximum acceleration factor is 20%.



Parabolic Indicator Calculation


P(t) = P(t-1) + AF x (EP(t-1) – P(t-1)),


Where:

P(t) – current value of the indicator;

P(t-1) – value in the previous period;

AF – acceleration factor, generally rising from 0.02 to 0.2 with a step of 0.02;

EP(t-1) – extreme price in the previous period.

 

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