Do you remember what is parabola from math classes? In complicated version, it is a curve formed by the intersection of a cone with a plane parallel to a straight line in its surface. In simple terms, it is something that looks like a bowl, banana, or rainbow. The parabola has many important applications, from a parabolic antenna or parabolic microphone to automobile headlight reflectors and the design of ballistic missiles. There are three types of parabolas: vertex, standard and intercept form. It is very useful for understanding physics, engineering, and trading. Read the article to learn how Parabola trading strategy is one of the most underestimated trading systems for the electronic contracts market.
The name of the strategy is derived from its main element: the parabolic SAR indicator used to determine the price direction of an asset, as well as draw attention to when the price direction is changing. On a chart, the indicator appears as a series of dots placed either above or below the price bars. A dot below the price is deemed to be a bullish signal. Conversely, a dot above the price is used to illustrate that the bears are in control and that the momentum is likely to remain downward. When the dots flip, it indicates that a potential change in price direction is under way. For example, if the dots are above the price, when they flip below the price, it could signal a further rise in price.
Parabola trading system is a perfect match for the Binomo traders since the broker’s service offers a wide range of tools for trading.
Settings for the Parabola Strategy
We recommend trading highly volatile asset for this strategy because parabolic is useless in calm markets. The best choice is to trade USD, EUR or GBP currency pairs and cryptocurrencies. Most traders prefer to work with Japanese candlesticks and use from one-to-five-minute timeframe. Considering that we will do trading on the lower timeframes, the acceleration and maximum acceleration of Parabolic SAR is set at 0.01 and 0.2, respectively.
In addition, we will use ADX in an unorthodox way. We are not going to use it for measuring the strength of the trend, for which, in fact, it is intended. We will be interested in the auxiliary lines +Di (positive) and -Di (negative). We will ignore the main line ADX, so it can be completely removed or discolored. The parameters of the oscillator are left default.
Reading a signal using the Parabola
For reading a signal in Parabola Strategy, we will rely on Parabolic while ADX will perform an auxiliary confirmation function. Parabolic SAR indicates the direction of the main trend, and we will buy a contract when it reverses. As the price of a stock rises, the dots will rise as well, first slowly and then picking up speed and accelerating with the trend. The SAR starts to move a little faster as the trend develops, and the dots soon catch up to the price.The indicator works well for capturing profits during a trend, but it can lead to many false signals when the price moves sideways or is trading in a choppy market. The indicator would have kept the trader in the trade while the price rose. When the price is moving sideways, the trader should expect more losses and/or small profits.
Buy the CALL option, after a series of indicator dots above the chart candles, when a new dot is formed, located under the bar. At the same time, the positive ADX line should cross the negative line up, confirming the signal.
Buy PUT contract, on the contrary, when a new point appearing above the opened candle, and +Di crosses -Di in the downward direction.
The expiration period should not exceed the time of formation of 3 bars.
The possibilities for Parabola strategy are limitless, as are the profit opportunities for the creative trader. It is also a useful system to monitor increased volatility whenever the value of the ATR has remained relatively stable for extended periods of time. It helps to get ready for what could be a turbulent market ride and avoid panicking.
The parabolic SAR attempts to give traders an edge by highlighting the direction an asset is moving, as well as providing entry and exit points. This article explained the basics of this indicator and show you how you can incorporate it into your trading strategy. We’ll also look at some of the drawbacks of the indicator.
Caution! This article is not intended to be investment advice. No strategy can guarantee 100% correct trading results. A successful trading result in the past is not a guarantee that it will be repeated in the future. Any information contained in this article is for informational purposes only.