STRATEGIES
Trading
parabolic trends
A defining feature of modern markets is the way the nature of the trend
changes. In older, slower markets, the most pertinent question was to
identify the type of trending activity found in a stock, and then to develop
Modern markets with increased volatility have changed the
nature of trade planning and the nature of the discipline necessary
for trading survival. Now we must recognise when circumstances
change and be prepared to act quickly to legitimately modify a trading
plan so that it rapidly reflects the changing nature of the trade. This is
frequently required as a trend develops.
A parabolic trend describes both changes in the nature of the trend
and describes the way price action develops. It is most clearly seen on
end-of-day charts but similar analysis applies to intraday trading, as
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the most appropriate trading approach. Once the analysis was
completed, there was little need to change the trading plan. Trading
discipline was built around carefully following the trading plan.
well. The key advantage of the parabolic trend is the way it sets a time
limit on the trend development. This means the trade plan now has a
definite “use-by” date and traders use this to achieve better exits.
Traders know to the day when the trend has a higher probability of
collapse.
The parabolic set-up
The parabolic trend is an exponentially calculated curve. Although
exponentially calculated, the shape of the curve is parabolic and it
February 2005 www.traders-mag.com
 STRATEGIES

reflects the acceleration in price activity. The curve starts off almost as
F1) The emerging trend
a horizontal line. The slope of the curve increases exponentially as
price action moves higher. The parabolic curve eventually develops
to a point where the last points on the curve create a vertical line. The
curve is then completed and so is the trend that it defines.
The parabolic trendline is defined by the ability of prices to stay
to the left of the parabolic curve. This is easily achieved while the slope
of the parabolic curve is gentle. Once the end of the curve moves to
vertical, then the curve can no longer move forward in time. The end
of the curve is a fixed date, say April 29. Price activity is not. On April
The emerging trend is
30, the stock will trade and no matter what price is achieved, the bar defined by an exponentially
for the day will fall to the RIGHT of the parabolic trendline. calculated parabolic curve
Parabolic trends are momentum driven and when the trend ends,
the sell-off is often dramatic and substantial.
This gives three specific characteristics to parabolic trends.

1. Parabolic trends have time limits.

2. Parabolic trends often collapse very rapidly when the time-based Each straight
edge trend line
exit has been reached. Prices typically gap down dramatically. is valid
3. Parabolic trends tend to collapse rapidly as soon as there is any
close below the parabolic trendline

We note that this gives us two exit points. The first is a close below
the parabolic trendline. The second is the day before the parabolic
trend goes vertical. This is a time-based exit, irrespective of the opportunities come from trades that enjoy the advantage of price
prevailing price. leverage because in these cases, higher percentage returns are
Parabolic trends are found at all price levels and multiples, from generally available.
speculative stocks to apparently staid blue chips. The best
Changes in the nature of the trend
The parabolic curve captures the developing nature of a trend.
F2) Changes in the trend behaviour Typically, the stock has been identified much earlier using classic trend
trading methods. The emerging trend is easily defined using a straight-
edge trendline. As the price action develops, the original straight-edge
line is no longer the best way to define the price action. A steep
0,55 trendline is more appropriate. In a classic parabolic trend, the ‘curve’
of the trend is constructed from a series of straight-edge trendlines
China Enersave 0,50 as shown in the figure 1.
Daily We can describe this emerging trend as a bubble, a rally, or a
Singapore momentum-driven trade. But these terms do not capture the
0,45
consistent nature of this type of trend. The acceleration of price has
0,40 all of these characteristics, but it is the parabolic nature of the trend
that sets this price activity apart. This parabolic nature sets up the
0,35 conditions of the trading plan.
These trends are traded in two ways. The first is by accident. We
Initial trend defined by 0,30 buy the stock at point A anticipating a steadily rising trend. By the
straight edge trend line or B time the trend develops to point B we realise that the nature of the
moving average crossovers
0,25 trend has changed. This is the point where the astute trader amends
his trading plan.
0,20 The second way is used by traders who deliberately set out to find
A these parabolic trend trading opportunities. The trend is recognised
0,15
only when it has developed around half-way through the full pattern.
The parabolic trend is difficult to identify in the initial stages, because
August September October November
it is indistinguishable from a slower moving trend development. It is
only as it develops the accelerating parabolic characteristics that it is
easily recognised. Recognition is primarily visual.

50 February 2005 www.traders-mag.com

 STRATEGIES

trendline. With a parabolic trend the term below is modified by

F3) VTI Virotect International, Daily
looking for a close to the right of the trendline.
2. A time-based stop-loss set on the date at which the parabolic
Inevitable chronological trendline approaches vertical and where the natural addition of
placement of daily price bars then next day’s price bar will carry price to the right of the parabolic
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curve. This can be used as a stop-loss point, but it is more effectively
80 applied as an exit condition.
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End of trend. Trading success in parabolic trends is based on an exit at the best
Exit on the day before price 70 possible price on the day prior to the known calendar end of the
move to the right of the parabolic trend. Traders who wait for the price move to the right of
parabolic curve 65
the trend before action may find that the sudden price drop destroys
60 a substantial portion of open profits.
Parabolic trend
55
is recognised Parabolic trading
here
VTI
50 Traders must always accept that most times they are going to miss
Virotect International out on the very start of a new trend as well as the very end of a new
Daily. 45
trend. We all nod our heads in agreement, but deep in our hearts our
40 trading shows how difficult it is for us to accept this conclusion. There
is no question that when we sell at $26.00 and prices go higher that
35
we feel disappointed. We quickly forget the 85% profit that is sitting
snug, secure and safe in our bank account. Instead there is a
temptation to count the money that we ‘could have had.’
Traders looking for parabolic trends start with a search based on This is a problem every trader faces. In a fast-moving parabolic
large price moves over one to three days. This method attempts to trend the problem is highlighted because the disappointment follows
finds stocks when the trend acceleration has commenced. If the trend quickly, and it sometimes highlights a very substantial difference in
development matches an emerging parabolic curve, then the trade is returns. The NBL example in figure 4 shows a parabolic trend that
treated as a parabolic trade. developed over several weeks. The trade was originally selected as a
Parabolic trends also develop over longer time periods where the trend trade at point A. Management was based on a straight-edge
emerging trend is still substantial in terms of reward but slower in trendline and moving averages with the entry at $1.05. As the
terms of development. The trading principles remain the same parabolic trend becomes clear, the new trend is plotted. As with any
irrespective of the time scale for the trend development. A parabolic trendline plot, the objective is to capture the maximum number of
trend that develops in ten trading days is traded the same way as a retreat and rebound points as possible. As shown with this example,
parabolic trend that develops over ten weeks. there are times when the most appropriate starting point for the plot

Time limits and stops

The parabolic trend trade has two exit conditions. The first is the F4) Where is the starting point?
standard trendline stop. In an ordinary uptrend, we use a straight-
1,55
edge trendline to define the trend. The trend is defined by the ability
1,5
of prices to stay above the trendline. It has no pre-determined end.
The parabolic trendline is defined by the ability of prices to stay NBL 1,45
Noni B 1,4
above and to the left of the parabolic curve. This is the key difference Daily bar chart
in the changing nature of the trend. As the trendline moves towards 1,35
the vertical, it sets a calendar or time-based point where prices will 1,3
inevitably move to the right of the trendline. This move signals an exit. 1,25
Once the end of the curve moves to vertical, then the curve can no 1,2
longer move forward in time. The end of the curve is a fixed date, say 1,15
Time limit for
April 29. Price activity is not. On April 30, the stock will trade and no parabolic 1,1
matter what price is achieved, the bar for the day will fall to the right A trend
development 1,05
of the parabolic trendline. Note higher starting point.
The action defines the
1
The move to the right is the equivalent of a move below the
placement of the curve. 0,95
trendline and is an exit signal. Parabolic trend trading has two
stop-loss conditions. 04 15 27 09 19 03 15 28 10 20 04 14 26 07 17 29 09
Nov Dec 2003 Feb Mar Apr May

1. The standard trendline stop-loss based on a close below the

52 February 2005 www.traders-mag.com

 This is invalid and the essential difference between the two
F5) How to work with the dividends
trendline construction principles explains why. A straight-edge
Moves time based end of trend trendline has no time-based end. As long as prices remain above the
line, the trend is intact. The parabolic trendline has a time-based
A B
1,55
component. Prices must remain to the left of the trendline. When the
line moves to vertical, just the passage of time will inevitably move
Value of Value of
1,50
dividend dividend prices to the right of the line and signal an end to the trend.
1,45 This time-based component is an immutable part of this trend
New standing
point for offset definition because it captures the way crowd excitement is
Offset trend line 1,40
trend accelerating. The parabolic trend defines that excitement and captures
1,35 the end of that excitement. The end may well be set by a change in
1,30
the status of the stock – it goes ex-dividend. The parabolic trend is a
function of time and slope. The crowd has already taken dividends
1,25 into account. If it remains excited, then prices will not adjust by the
Correct 1,20 Incorrect dividend value and the nature of the trend will continue to conform
within the parabolic trendline parameters.
Whereas trendlines may be adjusted after companies paid dividends, this Parabolic trends occur in all time frames. They emerge from
shouldn´t be done with parabol-lines. underlying trends and signal an important change in the nature of
trending activity. The most significant danger in a parabolic trend is
is some time after the initial breakout from the previous trend. the sudden and rapid collapse once the trend has ended. This destroys
The exit point is determined by the date on which the line moves open profits very rapidly. Effective recognition of the parabolic trend
towards vertical. The exit is on the prior day and is achieved at $1.50, allows traders to set better stops, and to fine tune exit strategies based
giving a 42% return. on a defined time-based end of the trend. Parabolic trades have a
On the day after the projected parabolic trendline went vertical, defined time limit. Traders know to the day when the trend has a higher
NBL prices gapped down. Traders who waited for end of day probability of collapse.
confirmation of the end of the trend and who took action on the next
trading day were able to get an exit at $1.45. Those who waited faced
exit opportunities between $1.40 and as low as $1.25. Daryl Guppy
Parabolic and dividends
When traders apply a straight-edge trendline as a stop-loss point, then
the solution to the ex-dividend day is straightforward. The value of
the dividend is projected from the low of the day prior to the ex-dividend
day. In figure 5a this is shown as the red line. The straight-edge Daryl Guppy is founder and director of
trendline shown is not plotted accurately, but we use it because we Guppytraders.com. He is an active trader
want to keep the charts comparable and demonstrate the principle. and author of trading books including
The straight-edge trendline is then moved downwards by this amount Better Stock Trading, Market Trading
and plotted as a new parallel, offset trendline. If the trendline is used Tactics, and Trend Trading. For more
as a profit protecting stop-loss point, then this is the only time that a information, visit www.guppytraders.com.
stop-loss point is moved downwards. Using an offset straight-edge Contact: Daryl_Guppy@compuserve.com
trendline when a stock goes ex-dividend is a
sensible solution to the price change that
occurs because the value of the stock has
changed as a result of an independent action.
That is, the dividend has been removed.
This offset principle does not apply with
a parabolic trend. The offset solution is
shown in figure 5b. Again, please note that
because of the way the chart has been
constructed, the parabolic trendline is not
plotted accurately. We use it only to show
the principle. In this case, the original
parabolic trendline A is offset by the value
of the dividend and plotted as parabolic
trendline B.

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