Trading Parabolic Arc Patterns by Suri Duddella Parabolic Arc chart patterns form when a steep rise in prices caused by irrational buying and intense speculation. Parabolic Arc patterns are rare, but they are reliable and are generated in mega bull trends. These patterns trend gradually making higher highs and lower lows in the beginning stages but can be volatile in the exhaustion and reversal stages. Irrational buying in the public generates a strong rally to push prices vertically, followed by a steep sell-off. Examples of this market types are the NASDAQ bullish markets during 1990-2000 (retraced 80%) and Gold prices from 2000-2011 (retraced 62%). Parabolic Arc is a reversal pattern and has a very predictable outcome. Although these patterns are predictable, they are relatively difficult to trade since the market sentiment is bullish and may be fairly tough to point reversals to trade. Most Parabolic Arc patterns have a significant correction of 62-79% of its price rise (from the top). Psychology behind Parabolic Arc Patterns Parabolic Arc patterns consist of both panic buying and panic selling scenarios. As a stock breaks out and starts to rise investors tend to feel its rising cycle is never going to end and build confidence based on hysteria. This misjudgment provides a blind faith in investors as the stock chart takes exponential curve based structure. In the state of rising parabolic arc, the price continues to rise without a pause and (or) with series of upside gaps. The stock price itself could multiply double or triple or quadruple in this process every year. In its last stage, parabolic arcs move vertically as panic buying (climactic buy) in an absence of sellers on some unfounded expectations/news/events. Most of this climactic buy is driven by momentum and amateur traders, in fear of being left behind. Finally, the reality sets in with some negative event or unfavorable news, and it takes out the buyers, this creates Panic Selling. The prices reverse dramatically with large ranges as the initial buyers take profits. The traders who bought at the top also start to sell on panic. Hence, in most cases, Parabolic Arcs are great trades after it reaches its panic buying. Trading Parabolic Arc Patterns Trade: In Parabolic Arc patterns, prices move up vertically and eventually the acceleration comes to a stop and then reverses. Prices start showing lower-lows and may attempt to regain the top again. Draw a channel connecting the top and bottom of the pattern. Enter a “short” trade at the breakdown of the channel trend line connecting the pattern high and pattern lows. Target: Measure the distance of the rise from the base to the top of the pattern. Most Parabolic Arc patterns return to the 62-79% of its rise. 50% is the first target. Examples The following chart shows the Parabolic Arc pattern formation in current USDCAD (weekly) from 2012 to 2016. Here are some of the key points and how it is traded.
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