Customize Parabolic Indicator Parameters

The acceleration factor is the amount the parabolic is increased every time the price makes a new high in an uptrend (a new low in a downtrend). The maximum factor is a limit above which the acceleration factor cannot go.

Most charting packages enable the user to set two parameters. These are the acceleration factor and the maximum acceleration factor. The acceleration factor is the amount the parabolic is increased every time the price makes a new high in an uptrend (a new low in a downtrend). The maximum factor is a limit above which the acceleration factor cannot go.

For example, if the acceleration factor is 0.2 and the maximum is .8, after the price has made four new highs since the parabolic began (that is, 0.2 times 4), the acceleration factor remains at .8 until the price crosses the parabolic and a new (SAR) trade is begun. The level of the acceleration factor is the most important.

With Moving Average (MA)s, there is always a trade-off between timeliness and sensitivity. A short-term Moving Average (MA) gives very timely signals, but is so sensitive that it also generates numerous whipsaws. On the other hand, a long-term average has fewer whipsaws, but crossovers are less timely. The Parabolic System works in exactly same way, but in this case the lower the acceleration factor, the less timely the signal, and the higher the acceleration factor, the more sensitive and timely are the signals. However, they result in more whipsaws.

Setting levels for the accelerating factor is a trial-and-error process just like the process of determining the optimum span for an Moving Average (MA). In experience, the default value provided with many software programs and Wilder's recommendation of 0.02 and 0.2 are quite satisfactory in most situations.

There are many ways in which the parabolic can be applied. One of the favorites is to enter a trade on an Moving Average (MA) crossover and exit the trade on a reverse crossover. However, if the parabolic crosses the Moving Average (MA), then it should be used to exit the trade.