Here’s a look at the parabolic trading system, with details on the way it works and how it’s calculated.
by John Sweeney
Few books have produced as many indicators of lasting value
as J. Welles Wilder’s New Concepts in Technical Trading Sys-tems. From that single text came the volatility index, the directional movement index, the relative strength index and the parabolic system, among numerous others. Even today, these four are staples of virtually every technical analysis toolbox after all these years because their robust simplicity gets directly to the concepts that percolate in traders’ minds upon viewing a chart.
One of the most robust — in the sense of simplicity,
intuitive appeal and effectiveness — is the parabolic time/
price system, as Wilder referred to it. He named the system so because the curved lines resulting from his computations
resembled a parabolicÝ (or French) curve, though they were
not true parabolas. It was within the conventions of the period to give indicators zippy, if inaccurate, names — stochastics being a similar example.
Wilder presented the indicator as a part of a stop-and-reverse (SAR) system — that is, you used the indicator to go
long or short so you were constantly in the market. Thus, it
was designed to be a trading indicator, not something to be
used for entering into long-term positions. A look at Figure
1 will reinforce that idea.