The Parabolic Trigger for V Tops and Bottoms
By Chuck LeBeau
Our previous Bulletin #45 about using the ADX for V shaped tops and bottoms was surprisingly well received. We had a great deal of very favorable feedback from our members who experimented with it. This very valuable pattern seems to do an excellent job of spotting major turning points in almost any market from Palladium to Natural Gas to Soybeans or even Lumber. This pattern seems to work extremely well in almost all futures, stocks and even the hard to trade stock indexes.
Much like a kid with a new toy, we've been having fun scanning through our charts and finding all the important signals that have been generated. For example, when looking at the stock index charts we had some very timely and important signals that the strong bear market in stocks was finally reversing. Let's review very briefly the conditions that create the pattern we are looking for.
REVIEW OF SETUPS and TRIGGERS: For those of you who are new to our work, we strongly recommend a two step process for entries. The first step is to identify some "setup" conditions that tell us that an entry is near. The second step is the "trigger" that tells us we must enter the trade NOW.
Just to refresh your memory from the previous Bulletin, let me review the "setup" conditions that we are looking for. Remember that we are trying to anticipate important "V" shaped reversal patterns. We want to be able to trade as near as possible to major tops and bottoms. As most of you are aware, a major directional price move will cause the ADX to rise to a high level. Depending on the direction of the price movement, either the Plus DI or the Minus DI will also move to an unusually high level. As the market peaks the DI will begin to decline while the ADX is flat or still rising. Near the top (or bottom) the ADX will become the highest line and will be above both the Plus DI and the Minus DI lines. This is our "setup" and alerts us that an important change in direction is likely in the very near future. The relationship of the three lines with the ADX being the highest tells us that there has already been a very extended price move that is running out of gas.
FINDING A TIMELY TRIGGER: While studying the charts using our new ADX pattern we found that our setup conditions often occurred early and that our DMI triggers were sometimes a little bit late. We don't mind having the setup conditions occur early. After all, lead indicators are rare and very hard to find. However to make this entry pattern even more exciting we thought we would see if we could make the triggers occur sooner.
Now that we have our lead indicator in place we want to find a timely entry trigger that gets us started in the direction of the new trend that should just be getting started. In Bulletin 45 we suggested that the crossing of the Plus DI and Minus DI lines could be the entry trigger. Although this method is acceptable and produces excellent results we observed that there might be room for further improvement. In many cases, by the time the Plus and Minus DI have crossed some profits in the new direction have already been left behind.
After some trial and error we found that the Parabolic indicator did just what we wanted. We believe we can use the Parabolic indicator instead of the DMI crossovers to provide much more timely entry triggers.
We have never liked the Parabolic stop and reverse (SAR) method as an independent trading system which was the intent of J. Welles Wilder, its originator. However we do like to use the Parabolic indicator for exits. As a system we find that the Parabolic reversal points occur much too frequently and this reversal system would drive us crazy with far too many false changes in direction. However the features of the Parabolic indicator that make it useful as an exit strategy are exactly what makes it the timely trigger we need for our ADX reversal pattern.
The Parabolic indicator accelerates steadily as the prices trend until the reversal points are very, very close to the peak of the move. The stronger the trend the closer the Parabolic gets to the prices. That is exactly what we want. When the Parabolic indicator is close to the prices and we have fulfilled our ADX setup conditions we are all set for an outstanding trade. Even a very small countertrend move will now quickly cross the Parabolic and signal our timely entry.
AN IDEAL ENTRY PLUS AN ADD POINT: We view the marriage of the ADX setup with the Parabolic entry trigger as an ideal combination. The entries now occur in a much more timely fashion than when we relied on the DI crossovers for our trigger. In fact, once the Parabolic has been crossed we can use the DI crossover as a confirmation and add to our position. I don't normally believe in pyramiding positions but in this case we are trading a very reliable pattern that is designed to identify a major reversal in direction, so I think that adding to positions early is a very good strategy.
As you can probably tell, I really like this ADX and Parabolic entry technique and I think that we have a lot of good concepts working for us here. We have an early setup, a timely trigger and now we can use the delayed confirmation of the DI crossovers as a point to pyramid the position. You can't ask for much more than that for an entry strategy that does a great job of catching big moves early. Take a look at this pattern on your favorite market and give me your comments.
By the way, I recently did an online seminar for Zap Futures brokerage firm where I discussed this new ADX - Parabolic trading pattern. This free online seminar has been archived and can be viewed by going to http://188.8.131.52/zapforms/clarch.cfm
The online seminar lasts a little over an hour and includes many charts as well as my voice-over presentation. This presentation is a preview of the type of material we cover in our workshops.
Good luck and good trading.
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Upcoming Workshops: Testimonials about our past Los Angeles Workshops
"I found my way to Chuck's System Traders Club website and became interested in the things Chuck was doing. Having received an email inviting me to attend his inaugural course held last November, I decided that it was worth the 12,000km trip to find out more. I have found the experience greatly worthwhile and it has set me on a new course in my trading career. I have found Chuck to be very approachable and his wealth of experience shows. I can thoroughly recommend his course and believe it would be of assistance for experienced and novice traders alike." A.K. New Zealand
"What I liked best was the organization, thoroughness, the small group setting and the combination of skills - Chuck's trading experience and Terence's computer brilliance. Unlike other seminars, I didn't feel that one minute was wasted. If you are a serious trader you must take this workshop - period! It was well organized, informative and eye opening - a real triumph of substance over style. I learned more in two days than in two years!" S.W. Palm Desert, California
Our next Workshop will be July 14th and 15th in Los Angeles.
Information about our Los Angeles Workshops can be found on the web at our http://www.traderclub.com/workshop.htm web page.
Reservations for our Los Angeles Workshop are now being accepted:
Phone Chuck LeBeau at (310) 265-9776 or send your reservation by e-mail to firstname.lastname@example.org.
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Our Forum pages on the web site contain very interesting discussions about trading. Our Forum has become one of the most active discussions groups on the web and the quality of the messages posted there is the best you will find anywhere. New messages are posted every day. I try to participate in the Forum discussions as much as my schedule will permit. However, many of our members know more than I do about many topics and they have very generously been sharing their knowledge with the rest of us.
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