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| Category: | Trend / Contra-trend |
| Formula Parmaters: | Acceleration Factor (default 0.02) |
| No. of Plots: | 1 (hereafter WP) |
| Screen Location: | Overlays bars / candlesticks |
| Plot Style(s): | WP: Crosshair (+). |
| Plot Significance: | WP: Crosshair drawn above price signifies downtrend. Crosshair drawn below price signifies uptrend. |
| When does a trade occur: | Automatically when stop is hit. |
| Order Type: | Stop Order |
| Details: | Attempts to follow trend. Typically, the most popular method of trading with this indicator was a stop based system. Thus, a trader will always be in the market either long or short, never flat. Once a position is initiated the trader places a reversal trailing stop each day. |
| Indicator Characteristics: |
The Parabolic had 1 input (the acceleration factor). If this was set too high, the participant got stopped in too often and whipsawed around, so losing money. Reducing the acceleration factor reduced the number of whipsaw entries but caused the indicator to be unresponsive and caused phase lag. Further to this, as it was stop based, it was too easily tricked out of a good position, so putting the participant on the wrong side of the market. Market makers soon became aware of this indicator and often took the market back to the parabolic stop before immediately retracing leaving the participant to take heat on their new position. WARNING: Taking every trade generated by this indicator is almost certain to lose money over time. A stop based indicator is not only impractical if you trade several markets but brokers don't always advise that your stop has been hit till the next market day, so you can be holding a position you are unaware of, nor protected by a stop and possibly have unwittingly placed another stop order the next day which would (if hit) double up your position. However, some of these limitations are mitigated by electronic order entry. Still, traders need prompt notification of fills. WARNING: Trader's regularly make mistakes when entering orders. Any system which requires a high number of orders per trade will increase the risk of losing money. |
