| Characteristic: | Stop and Reversal Indicator | ||
| Parameter Defaults: | Acceleration | 0.02 | controls the acceleration of the trail |
| AF Max | 0.20 | controls the maximum acceleration of the trail | |
| Plots: | SAR | ||
Parabolic was developed by Welles Wilder Jr. initially as a "Stop And Reverse" indicator and suggested that trades were implied by the parabolic moving above or below price. However, it is probably better utilized as a trailing stop in a trending move.
The Parabolic takes into account the relationship between a price and time, using this relationship to determine acceleration of the parabolic. This is determined by an acceleration factor that starts at 0.02 (or the input acceleration factor as inserted by the user) and increases by the same amount every time a new price extreme is reached (a new high in an uptrend or a new low in a downtrend). The difference between price and the previous parabolic is then used to calculate the parabolic for the next bar. The acceleration factor increases until it reaches a "maximum step" defaulted to 0.20. Once price touches the parabolic, the position of the parabolic reverses and begins at the extreme of the previous move. (the highest high in a reversal from a move higher or the lowest low in a reversal after a move lower.
The indicator may also be used to determine stop points.
The above chart shows that Parabolic performs well as a trailing stop in a trend. However, during consolidating markets it tends to suffer from whipsaws and from this point of view is not recommended as a signal to establish a position.
