wilder's parabolic trading indicator

Futures Charts - Technical Analysis Help

Wilder's Parabolic Indicator

The Parabolic system, as described in technical analyst Welles Wilder's book New Concepts In Technical Trading Systems, is a complete stop-setting entry and exit trading system. The system is designed to allow more leeway or tolerance for contra-trend price fluctuation early in a new trade, then to progressively tighten a protective trailing stop order as the trend matures.

The concept draws on the idea that time is an enemy, and unless a trade can continue to generate more profits over time it should be liquidated. Thus, the Parabolic Time/Price System rides the trend until the SAR price is penetrated. Then the existing position is closed out and the reverse position is opened.

The expression 'parabolic' derives from the shape of the curve the stops create as they appear on the chart (this can be seen when the Parabolic indicator is applied to a data series on a chart window).

To calculate the function, we must first find an extreme reference point. On the long side this price is usually the lowest price recorded during the previous closed short position. On the short side this extreme price is usually the highest price recorded during the previous closed out long position.

In practice, however, you won't have an extreme reference point for the very first trade as there are no previous trades. To account for this, the function uses, as a default, either the High or Low of the previous bar before the first
trade.

Reference:

Wilder, Welles, Jr. New Concepts in Technical Trading Systems. Trend Research. McLeansville, NC