Parabolic Stop and Reverse at Trade10.com- The science of trading market momentum for stocks, options, futures and bonds.

Critical Day Analysis

Our critical day analysis is all about trend reversals. We tell you when there is a high potential for a reversal of the short trend and we've been doing it since 1994 with an 80%* accuracy.

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Parabolic Stop & Release (SAR)

Parabolic Stop and Release was introduced by J Welles Wilder. The Parabolic SAR is a trend following indicator that is designed to create a trailing stop. This is a point that follows a prevailing trend, giving a possible value for a stop loss order that is far enough away from the original trend to avoid being stopped out with a small consolidation and retraction moves. The trailing stop moves with the trend, accelerating closer to price action as time passes giving the path of the indicator a parabolic look. When price penetrates the SAR a new calculation is started taking the other side of the market with an initial setting that again allows a certain amount of initial volatility if the trend is slow to get underway.

Trading Strategies

The SAR can be used to set stop orders later in the trend or as a conformational tool in confirming the trend. Some traders may consider the SAR for both entry and exit signals but some caution should be applied to this approach as whipsaw losses can mount during a time period of multiple short trend reversals over a short time period.

Setting Your Parameters

The shape, slope and speed of the SAR, are controlled by three parameters. The starting acceleration factor (AF), the increment that the AF can change when a new price high or low is made and the maximum AF. Choices for these should reflect the price characteristics of the base security being analyzed and the strategy, and personal preferences of the trader using the indicator.

To the right technical studies are examined in more detail to provide a sense of conformational evidence for traders of the critical day. Click on any of the terms to take a closer look at a technical discussion on that topic. All formations, patterns, indicators and technical tools fail at various times and so should only be used to build a body of evidence in forming a trading decision rather than being solely relied upon. There are a number of valuable studies that lead to intuitive understandings about price and volume but a strong compliment to technical analysis is an understanding of the trends and changes in the fundamentals and economic activity that ultimately lead valuation levels in the markets.

Walk through a critical day

The graphs show a price plot of the Dow Jones Industrials from Sept 28/00 to early November. The First graph ends on November 3/00, two days before an upcoming critical day on November 7/00. Our members looking at the market are expecting a trend reversal to occur due to the high rate of success in our research. Ideally a member will be using their own skills to judge the supply and demand changes, using technical and fundamental indications to confirm suspicions of a reversal, and trade accordingly.
On the second graph we see that the price action on November 6 was a bullish day, reversing the short trend so that the short trend leading into the critical day is now up. A critical day is an expectation of a reversal of the short trend that immediately precedes the critical day. In the case of the November 7 signal, given to members 3 days before, is an indication that the upward moving trend, recognized at the close of November 6 is expected to reverse direction.
On the third graph we can see that November 7 was a low volatility after a large gain on November 6 of about 160 points for the Dow Jones Industrials. The subsequent move over the three days following the November 7 signal saw the Dow Jones Industrials fall 376 points. The next day, November 13, the Dow Jones Industrials lost an additional 83 points with intra-day low a full 609 point loss since the open on the critical day.

Most recent signals

A closer view of the most recent signals. You can see the short trend immediately prior to a successful critical day, reverses coming away from the critical day. Often a failed critical day will indicate a stronger bias in the market for continuation of the trend that was in place prior to the critical day. A failed signal can therefore provide as much information and opportunity as a successful one. Take a look at tech studies to develop a sense of trend reversals and use.

Tech Studies

Comparative Relative Strength

Congestion Pattern

Consolidation