Interpreting Parabolic Indicator

A parabolic would simultaneously trigger the liquidation of a long position and the entering of a short one.

The parabolic shows up on the chart as a parabolic-shaped curve that is plotted above and below the price. This curve is often referred to as the SAR, which stands for stop and reversal system. This is because the parabolic, when triggered, is often used not only to stop a position, but to actually reverse it. Thus, a parabolic would simultaneously trigger the liquidation of a long position and the entering of a short one.

Personally, I prefer to select an entry point and use the Parabolic System for the purposes of setting the stop, rather than continually reversing positions. Remember, most losing trades develop when you go against the direction of the main trend. Strict use of the parabolic with the stop and reversal approach totally ignores this discipline. That's why I prefer to use the Parabolic System as a stop system only, and not a stop and reverse system.

Strict use of the parabolic would involve buying when the price crosses above it, placing the stop well underneath the purchase price. This is the downside because there is considerable risk at this point. Gradually, the parabolic picks up steam and the risk is dramatically reduced as upside momentum increases.

Like most other indicators, the parabolic does not do as well in a trading range. This is because it is unable to gather sufficient momentum to quickly reduce the risk.