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.
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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.
The parabolic trend does not provide a method to set upside targets; it captures the fast upward move and helps define when it has ended. The defining feature on this chart is resistance near 12,000. There is a minor resistance/support level around 11,350.
This suggests that the current rise may weaken as it moves towards 12,000. However, as long as the price activity continues to the left of the parabolic trend line, the price may easily move above the 12,000 resistance level.
The key feature of value to traders is a move to the right of the parabolic trend line. Once this happens there is a high probability that the trend will end and the pair will retreat rapidly.
A 50 percent retracement would find support near 10,450. This above the top of a small consolidation band between 9900 and 10,200 so there is a good probability of a retracement towards 10,200.
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Will this uptrend end? Inevitably it will. We cannot set the upside target using chart analysis, but we can provide a high probability outcome as to how the inevitable trend collapse may develop. The parabolic trend line provides the trigger conditions that tell traders to trade from the short side.
Daryl Guppy is a trader and author of Trend Trading, The 36 Strategies of the Chinese for Financial Traders – www.guppytraders.com. He is a regular guest on CNBCAsia Squawk Box. He is a speaker at trading conferences in China, Asia, Australia and Europe.