However, if done correctly, the benefits of trading a parabolic move can be great as they offer rapid profit potential. Prices tend to move very sharply at the end of a parabolic move.
Identifying a parabolic curve
The key to trading parabolic moves is first being able to identify them correctly. Although the parabolic SAR indicator is sometimes used by traders it is not always effective in finding parabolic moves so a better option is to simply scan charts with the naked eye.The first thing you are looking for is a market that is increasing at an exponential rate. Each bar will therefore be increasing in size and if it is an uptrend, the curve will begin to look like the right hand side of a circle – as it nears the diameter. It stands to reason that the closer the market gets to vertical, the better the chance of a parabolic move – since no market can go up forever.
For good examples, take a look at Silver in the 1970s or in 2011, or the US housing crash. The more vertical or parabolic the state of the market, the bigger the resulting price correction usually is.
Taking profits
Entering into a parabolic move can be scary, since the market will be at its most rampant. Adverse price moves are therefore common and your position will most likely lose money at first.However, it is important to wait. If you have entered in a true parabolic move you will not have to endure too much pain. Indeed once the correction comes you will likely see the market lose as much as 50% and you will have successfully burst your first bubble! It’s important not to get too greedy though and you should aim to target no more than 35% profit.
Time frames
Generally, parabolic moves are best traded over longer time frames. Trying to identify parabolics in short term charts such as 15 minute or one hour charts is a dangerous strategy since price moves can go on for much longer periods. It is therefore best to seek out parabolic moves in monthly or weekly charts only. You should also try to look at the fundamentals to support your theory. In general, any analysis you can gather to support your trade will help you with the conviction needed to trade against the trend.
Editors’ Picks
EUR/USD clings to gains above 1.0750 after US data
EUR/USD manages to hold in positive territory above 1.0750 despite retreating from the fresh multi-week high it set above 1.0800 earlier in the day. The US Dollar struggles to find demand following the weaker-than-expected NFP data.
GBP/USD declines below 1.2550 following NFP-inspired upsurge
GBP/USD struggles to preserve its bullish momentum and trades below 1.2550 in the American session. Earlier in the day, the disappointing April jobs report from the US triggered a USD selloff and allowed the pair to reach multi-week highs above 1.2600.
Gold struggles to hold above $2,300 despite falling US yields
Gold stays on the back foot below $2,300 in the American session on Friday. The benchmark 10-year US Treasury bond yield stays in negative territory below 4.6% after weak US data but the improving risk mood doesn't allow XAU/USD to gain traction.
Bitcoin Weekly Forecast: Should you buy BTC here? Premium
Bitcoin (BTC) price shows signs of a potential reversal but lacks confirmation, which has divided the investor community into two – those who are buying the dips and those who are expecting a further correction.
Week ahead – BoE and RBA decisions headline a calm week
Bank of England meets on Thursday, unlikely to signal rate cuts. Reserve Bank of Australia could maintain a higher-for-longer stance. Elsewhere, Bank of Japan releases summary of opinions.
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