Parabolic trends define fast moving momentum trades, and are of particular interest when they collapse as this signal short trading opportunities.
The Indonesian rupiah, which has fallen drastically over the past few months, prompting the Indonesian central bank to take aggressive action to halt the currency's fall, has developed a parabolic trend.
The parabolic trend - best described using an arc or a parabolic curve – is found most frequently in bull markets, or markets showing volatile rebounds. It starts off slowly then accelerates very rapidly until the activity on the price chart is almost vertical.
Parabolic trends end very quickly, often with substantial price pullbacks that gap well below the previous close. The pullback, which is typically 50 percent of the parabolic rise but could be as much 100 percent of the parabolic rise, becomes an ideal short trading opportunity.
While parabolic trends are most frequently seen in fast moving stocks, they are also present in fast moving index areas, or markets. With a parabolic trend the trend cannot be adequately described by straight edge trend lines, rather the price action uses a parabolic curve as a support level.
It's important to treat this pattern with a little more caution in currency charts because currency trading is driven by factors others than psychology. Patterns which are not based on psychology are not as effective, but they still provide guidance. In this spirit we apply the parabolic analysis to the rupiah chart.