Parabolic moves occur when a market moves up or down in an exponential type way, leading to what looks on a chart like the formation of a parabolic curve. These are very rare moves that typically occur from periods of rampant speculation or at the end of bubbles. They can be hard to trade too, since buying or selling into a parabolic move takes a lot of courage.
However, if done correctly, the benefits of trading a parabolic move can be great as they offer rapid profit potential. Prices tend to move very sharply at the end of a parabolic move.
Guest post by FXTM
Identifying a parabolic curve
The key to trading parabolic moves is first being able to identify them correctly. Although the parabolic SAR indicator is sometimes used by traders it is not always effective in finding parabolic moves so a better option is to simply scan charts with the naked eye.
The first thing you are looking for is a market that is increasing at an exponential rate. Each bar will therefore be increasing in size and if it is an uptrend, the curve will begin to look like the right hand side of a circle – as it nears the diameter. It stands to reason that the closer the market gets to vertical, the better the chance of a parabolic move – since no market can go up forever.
For good examples, take a look at Silver in the 1970s or in 2011, or the US housing crash. The more vertical or parabolic the state of the market, the bigger the resulting price correction usually is.
Taking profits
Entering into a parabolic move can be scary, since the market will be at its most rampant. Adverse price moves are therefore common and your position will most likely lose money at first.
However, it is important to wait. If you have entered in a true parabolic move you will not have to endure too much pain. Indeed once the correction comes you will likely see the market lose as much as 50% and you will have successfully burst your first bubble! It’s important not to get too greedy though and you should aim to target no more than 35% profit.
Time frames
Generally, parabolic moves are best traded over longer time frames. Trying to identify parabolics in short term charts such as 15 minute or one hour charts is a dangerous strategy since price moves can go on for much longer periods. It is therefore best to seek out parabolic moves in monthly or weekly charts only. You should also try to look at the fundamentals to support your theory. In general, any analysis you can gather to support your trade will help you with the conviction needed to trade against the trend.
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