ertia. This is a signal to cover shorts and getready to go long.
Divergences between Bull and Bear Power and prices mark the best trad-ing opportunities. X-rays show broken bones under healthy skin —and Elder-ray shows when the dominant group is broken below the surface of a trend.
42. FORCE INDEX
Force Index is an oscillator developed by this author. It measures the force ofbulls behind every rally and of bears behind every decline.
Force Index combines three essential pieces of market information — thedirection of price change, its extent, and trading volume. It provides a new,practical way of using volume to make trading decisions.
Force Index can be used raw, but it works better if you smooth it with amoving average. Force Index smoothed with a short MA helps pinpointentry and exit points. Force Index smoothed with a long MA reveals majorchanges in the force of bulls and bears.
How to Construct Force Index
The force of every move is defined by its direction, distance, and volume. Ifprices close higher than the previous bar, the force is positive. If prices closelower than the previous bar, the force is negative. The greater the change in
prices, the greater the force. The bigger the volume, the greater the force ofthe move (see worksheet, Figure 42-1).
Force Index = Volumejogay * (Close gogay ~ CloS€ yesterday)
Raw Force Index is plotted as a histogram, with a horizontal centerline at228 NEW INDICATORS
Nikkei Dow
 
 
 
23400; 2163; 1263192: 621514; -180921
Figure 42-1. Force Index Worksheet
Force Index = Volumetoday * (Closetoday — Closeyesterday)
Short-term Force Index is smoothed with a 2-day exponential movingaverage. Intermediate-term Force Index is smoothed with a 13-day expo-nential moving average. You can use a programming trick to reduce verylarge Force Index numbers-simply divide Force Index by the latest clos-ing price.
 
a zero level. If the market closes higher, Force Index is positive and is plot-ted above the centerline. If the market closes lower, Force Index is negativeand plotted below the centerline. If the market closes unchanged, ForceIndex equals zero.
The histogram of raw Force Index appears very jagged. This indicatorgives better trading signals after being smoothed with a moving average (seeSection 25). A 2-day EMA of Force Index provides a minimal degree ofsmoothing. It is useful for finding entry points into the markets. It pays tobuy when the 2-day EMA is negative and sell when it is positive, as long asyou trade in the direction of the 13-day EMA of prices.
A 13-day EMA of Force Index tracks longer-term changes in the force ofbulls and bears. When it crosses above its centerline, it shows that bulls are42. FORCE INDEX 229
in control. When it turns negative, it shows that bears are in control.Divergences between a 13-day EMA of Force Index and prices identifyimportant turning points.
Trading Psychology
When the market closes higher, it shows that bulls won the day’s battle, andwhen it closes lower, it shows that bears carried the day. The distancebetween today’s and yesterday’s closing prices reflects the margin of victoryby bulls or bears. The greater this distance, the more important the victory.
Volume reflects the degree of commitment by the mass of market partic-ipants (see Section 32). Prices moving at high volume are like anavalanche that gathers mass as it rolls. High-volume rallies and declineshave more inertia and are more likely to continue. Low volume, on theother hand, shows that the supply of losers is running low and a trend isnearing an end.
Prices reflect what market participants think, while volume reflects theirfeelings. Force Index combines price and volume —it shows whether thehead and the heart of the market are in gear with each other.
When Force Index rallies to a new high, it shows that the force of bulls ishigh and the uptrend is likely to continue. When Force Index falls to a newlow, it shows that the force of bears is big and the downtrend is likely to per-sist. If the change in prices is not confirmed by volume, Force Index flattensout and wams that a trend is about to reverse. It also flattens out and warnsthat a trend reversal is near if high volume generates only a small pricemove.
Trading Rules
Short-Term Force Index
A 2-day EMA of Force Index is a highly sensitive indicator of the short-termforce of bulls and bears. When it swings above its centerline, it shows thatbulls are stronger, and when it falls below its centerline, it shows that bearsare stronger.
A 2-day EMA of Force Index is so sensitive that it is best used to fine-tune signals of other indicators. When a trend-following indicator identifies230 NEW INDICATORS
Nikkei Dow13-day EMA
 
Figure 42-2 Force Index—2-Day EMA
This sensitive short-term indicator pinpoints buying opportunities inuptrends and shorting opportunities in downtrends. It helps traders buyweakness and sell strength. When the trend, identified by the slope ofthe 13-day EMA, is up and Force Index declines below zero, it gives abuy signal. When the trend is down and Force Index rallies above zero,it gives a signal to sell short.
The decision when to take profits depends on whether you are ashort-term or a long-term trader. If you are a short-term trader, sell longswhen Force Index becomes positive or cover shorts when Force Indexbecomes negative. A long-term trader has to wait until the exponentialmoving average changes its direction or until there is a divergencebetween Force Index and price (marked by slanted arrows on this chart).When you are trading with the trend, you can add to your positions(pyramid) whenever Force Index gives additional signals in the directionof the trend.
 
an uptrend, the declines of the 2-day EMA of Force Index spot the best buy-ing points. When a trend-following tool identifies a downtrend, a 2-dayEMA of Force Index pinpoints the best shorting areas (Figure 42-2).42. FORCE INDEX 231
1. Buy when a 2-day EMA of Force Index turns negative duringuptrends.
No matter how fast and furious an uptrend, there are always pullbacks. Ifyou delay buying until the 2-day EMA of Force Index turns negative, youwill buy closer to a short-term bottom.
When a 2-day EMA of Force Index turns negative during an uptrend,place a buy order above the high price of that day. If the uptrend resumes andprices rally, you will be stopped in on the long side. If prices continue todecline, your order will not be executed. Then lower your buy order towithin one tick of the high of the latest bar. Once your buy stop is triggered,place a protective stop below the low of the trade day or the previous day,whichever is lower. This tight stop is seldom touched in a strong uptrend, butit gets you out early if the trend is weak.
2. Sell short when a 2-day EMA of Force Index tums positive in down-trends.
When trend-following indicators identify a downtrend, wait until the 2-dayEMA of Force Index turns positive. It indicates a quick splash of bullish-ness —a shorting opportunity. Place an order to sell short below the low ofthe latest price bar.
If the 2-day EMA of Force Index continues to rally after you place yoursell order, raise it daily to within a tick of the latest bar’s low. Once pricesslide and you go short, place a protective stop above the high of the latestprice bar or the previous bar, whichever is higher. Move your stop down to abreak-even level as early as possible.
A 2-day EMA of Force Index helps you decide when to pyramid yourpositions. You can add to longs in uptrends each time Force Index turns neg-ative and add to shorts in downtrends whenever Force Index turns positive.
Force Index even provides a glimpse into the future. When a 2-day EMAof Force Index falls to its lowest low in a month, it shows that bears arestrong and prices are likely to fall even lower. When a 2-day EMA of ForceIndex rallies to its highest level in a month, it shows that bulls are strong andprices are likely to rise even higher. .
A 2-day EMA of Force Index helps decide when to close out a position. Ashort-term trader who buys when this indicator is negative should sell whenit tums positive. A short-term trader who goes short when this indicator ispositive should cover when it turns negative. A longer-term trader should get232 NEW INDICATORS
out of his position only if a trend changes (as identified by the slope of a 13-day EMA of price) or if there is a divergence between 2-day EMA of ForceIndex and the trend.
3. Bullish divergences between 2-day EMA of Force Index and pricegive strong buy signals. A bullish divergence occurs when prices fallto a new low while Force Index makes a more shallow bottom.
4. Bearish divergences between 2-day EMA of Force Index and pricegive strong sell signals. A bearish divergence occurs when prices rallyto a new high while Force Index traces a lower second top.
A 2-day EMA of Force Index fits well into the Triple Screen trading sys-tem (see Section 43). Its ability to find short-term buying and selling pointsis especially useful when it is combined with a longer-term trend-followingindicator.
Intermediate-Term Force Index
A 13-day EMA of Force Index identifies longer-term changes in the strength ofbulls and bears. Its position relative to its centerline shows which group is incontrol. Its divergences from prices identify major turning points (Figure 42-3).
5. When a 13-day EMA of Force Index is above the centerline, bulls are incontrol of the market, and when it is below the centerline, bears are incontrol. When this indicator flutters near its centerline, it identifies atrendless market— a warning not to use trend-following trading methods.
When a rally begins, prices often jump on heavy volume. When a 13-dayEMA of Force Index reaches a new high, it confirms the uptrend. When theuptrend ages, prices rise more slowly or volume becomes thinner. Then a 13-day EMA of Force Index starts tracing lower tops and eventually dropsbelow its centerline. It signals that the back of the bull has been broken.
6. A new peak in the 13-day EMA of Force Index shows that a rally islikely to continue. A bearish divergence between a 13-day EMA ofForce Index and price gives a strong signal to sell short. If prices reacha new high but this indicator traces a lower peak, it warns that bullsare losing power and bears are ready to take control.42. FORCE INDEX 233
Nikkei Dow13-day EMA
Force Index 13-day EMA
jun U. ug ep
Figure 42-3 Force Index—13-Day EMA
Divergences between a 13-day EMA of Force index and prices identifyimportant turning points in the markets. A bullish divergence between a13-day EMA of Force Index and the Nikkei Dow in August pointed to abuying opportunity. The Nikkei Dow retested its lows, but Force Indextraced a much more shallow second bottom, giving a buy signal.
A spike low in Force Index, like the one seen in August, gives twotrading messages. In the long run, it usually marks the end of an impor-tant decline. In the short run, it tells traders that the latest price bottom islikely to be retested or exceeded.
The Nikkei Dow surged higher in October, but Force Index kept trac-ing lower tops. Its bearish divergence showed that bulls were growingweak and prices neared a top. There was plenty of time to position short.The spike low at the right edge of the chart indicates that the latest pricelow is likely to be retested or exceeded.
 
7. Anew low in 13-day EMA of Force Index shows that a downtrend islikely to continue. If prices fall to a new low but this indicator traces amore shallow low, it warns that bears are losing power. This bullishdivergence gives a strong buy signal.234 NEW INDICATORS
When a downtrend begins, prices usually drop on heavy volume. When a13-day EMA of Force Index falls to new lows, it confirms the decline. Asthe downtrend grows old, prices fall more slowly or volume dries up. Thenthe 13-day EMA of Force Index starts tracing more shallow bottoms andfinally rallies above its centerline. It shows that the back of the bear has beenbroken.IXTrading Systems
 
43. TRIPLE SCREEN TRADING SYSTEM
The Triple Screen trading system was developed by this author and has beenused for trading since 1985. It was first presented to the public in April 1986,in an article in Futures Magazine.
Triple Screen applies three tests or screens to every trade. Many tradesthat seem attractive at first are rejected by one or another screen. Thosetrades that pass the Triple Screen test have a higher degree of profitability.
Triple Screen combines trend-following methods and counter-trend tech-niques. It analyzes all potential trades in several timeframes. Triple Screen ismore than a trading system, it is a method, a style of trading.
Trend-Following Indicators and Oscillators
Beginners often look for a magic bullet—a single indicator for makingmoney. If they get lucky for a while, they feel as if they discovered the royalroad to profits. When the magic dies, amateurs give back their profits withinterest and go looking for another magic tool. The markets are too complexto be analyzed with a single indicator.
Different indicators give contradictory signals in the same market. Trend-following indicators rise during uptrends and give buy signals, while oscilla-tors become overbought and give sell signals. Trend-following indicators
235236 TRADING SYSTEMS
turn down in downtrends and give signals to sell short but oscillators becomeoversold and give buy signals.
Trend-following indicators are profitable when markets are moving butlead to whipsaws in trading ranges. Oscillators are profitable in tradingranges, but give premature and dangerous signals when the markets begin totrend. Traders say: “The trend is your friend,” and “Let your profits run.”They also say: “Buy low, sell high.” But why sell if the trend is up? Andhow high is high?
Some traders try to average out the votes of trend-following indicatorsand oscillators. It is easy to rig this vote. If you use more trend-followingtools, the vote will go one way, and if you use more oscillators, it will go theother way. A trader can always find a group of indicators telling him what hewants to hear.
The Triple Screen trading system combines trend-following indicatorswith oscillators. It is designed to filter out their disadvantages while preserv-ing their strengths.
Choosing Timeframes—tThe Factor of Five
Another major dilemma is that the trend can be up and down at the sametime, depending on what charts you use. A daily chart may show an uptrendwhile a weekly chart shows a downtrend, and vice versa (see Section 36). Atrader needs to handle conflicting signals in different timeframes.
Charles Dow, the author of the venerable Dow theory, stated at the turn ofthe century that the stock market had three trends. The long-term trend lastedseveral years, the intermediate trend several months, and anything shorterthan that was a minor trend. Robert Rhea, the great market technician of the1930s, compared the three market trends to a tide, a wave, and a ripple. Hebelieved that traders should trade in the direction of the market tide and takeadvantage of the waves but ignore the ripples.
Times have changed, and the markets have become more volatile. Tradersneed a more flexible definition of timeframes. The Triple Screen trading sys-tem is based on the observation that every timeframe relates to the larger andshorter ones by approximately a factor of five (see Section 36).
Each trader needs to decide which timeframe he wants to trade. TripleScreen calls that the intermediate timeframe. The long-term timeframe isone order of magnitude longer. The short-term timeframe is one order ofmagnitude shorter.43. TRIPLE SCREEN TRADING SYSTEM 237
For example, if you want to carry a trade for several days or weeks, thenyour intermediate timeframe will be defined by the daily charts. Weeklycharts are one order of magnitude longer, and they determine the long-termtimeframe. Hourly charts are one order of magnitude shorter, and they deter-mine the short-term timeframe.
Day-traders who hold their positions for less than an hour can use thesame principle. For them, a 10-minute chart may define the intermediatetimeframe, an hourly chart the long-term timeframe, and a 2-minute chart theshort-term timeframe.
Triple Screen demands that you examine the long-term chart first. Itallows you to trade only in the direction of the tide—the trend on the long-term chart. It uses the waves that go against the tide for entering positions.For example, daily declines create buying opportunities when the weeklytrend is up. Daily rallies provide shorting opportunities when the weeklytrend is down.
First Screen—Market Tide
Triple Screen begins by analyzing the long-term chart, one order of magni-tude greater than the one you plan to trade. Most traders pay attention only tothe daily charts, with everybody watching the same few months of data. Ifyou begin by analyzing weekly charts, your perspective will be five timesgreater than that of your competitors.
The first screen of Triple Screen uses trend-following indicators to iden-tify long-term trends. The original system uses the slope of weekly MACD-Histogram (see Section 26) to identify the market tide. The slope is definedas the relationship between the two latest bars. When the slope is up, itshows that bulls are in control — it is time to trade from the long side. Whenthe slope is down, it shows that bears are in control and tells you to tradeonly from the short side (Figure 43-1).
A single uptick or a downtick of weekly MACD-Histogram indicates achange of a trend. The uptums that occur below the centerline give betterbuy signals than those above the centerline (See “Indicator Seasons” inSection 36). The downturns that occur above the centerline give better sellsignals than the downturns below the centerline.
Some traders use other indicators to identify major trends. Steve Notiswrote an article in Futures magazine showing how he used the DirectionalSystem as the first screen of Triple Screen. Even a simpler tool, such as the238 TRADING SYSTEMS
40.6‘ Gold Weekly 3.5
a5pyaded ‘iH 3614
My 35.3MACD-Histogram 2.0826
iL nM 0,90048.2817
ai van 71,46392.6460
——Teb Tar fpr ayn Yau “Sep ET Tv
Figure 43-1. Weekly MACD-Histogram—The First Screen ofTriple Screen
The slope of MACD-Histogram is defined by the relationship between itstwo latest bars (see inset). Triple Screen tells traders to examine weeklycharts before looking at the dailies. When the weekly trend is up, itallows us to trade only from the long side or stand aside. When theweekly trend is falling, it allows us only to trade from the short side orstand aside.
Weekly MACD-Histogram gives a buy signal when its slope turns up.The best buy signals are given when this indicator turns up below itscenterline. When MACD-Histogram turns down, it gives a sell signal.The best sell signals are given when it turns down from above its center-line (see “Indicator Seasons,” Section 36). Once you find the trend of theweekly MACD-Histogram, turn to daily charts and look for trades in thesame direction.
 
slope of a 13-week exponential moving average, can serve as the first screenof the Triple Screen trading system. The principle is the same. You can usemost trend-following indicators, as long as you analyze the trend on theweekly charts first and then look for trades on the daily charts only in thatdirection.43. TRIPLE SCREEN TRADING SYSTEM 239
Screen One: Identify the weekly trend using a trend-following indica-tor and trade only in its direction.
A trader has three choices: buy, sell, or stand aside. The first screen of theTriple Screen trading system takes away one of those choices. It acts as acensor who permits you only to buy or stand aside during major uptrends. Itallows you only to sell short or stand aside during major downtrends. Youhave to swim with the tide or stay out of the water.
Second Screen—Market Wave
The second screen identifies the wave that goes against the tide. When theweekly trend is up, daily declines point to buying opportunities. When theweekly trend is down, daily rallies point to shorting opportunities.
The second screen applies oscillators to the daily charts in order to iden-tify deviations from the weekly trend. Oscillators give buy signals whenmarkets decline and sell signals when markets rise. The second screen of theTriple Screen trading system allows you to take only those daily signals thatpoint in the direction of the weekly trend.
Screen Two: Apply an oscillator to a daily chart. Use daily declinesduring weekly uptrends to find buying opportunities and daily ralliesduring weekly downtrends to find shorting opportunities.
When the weekly trend is up, Triple Screen takes only buy signals fromdaily oscillators and ignores their sell signals. When the weekly trend isdown, Triple Screen takes only shorting signals from oscillators and ignorestheir buy signals. Force Index and Elder-ray are good oscillators to use withTriple Screen, but Stochastic and Williams %R also perform well.
When the weekly MACD-Histogram rises, the 2-day EMA of Force Index(see Chapter 8) gives buy signals when it falls below its centerline, as long as itdoes not fall to a new multiweek low. When the weekly MACD-Histogramdeclines, Force Index gives shorting signals when it rallies above its centerline,as long as it does not rise to a new multiweek high (Figure 43-2).
When the weekly trend is up, daily Elder-ray_ (see Section 41) gives a buysignal when Bear Power declines below zero and then ticks back up toward240 TRADING SYSTEMS
978.6378.3362.8353.6bb bb 343.3967.1516.966.6{—] Wkly MACD buy 833.8y re | a . 30P 0 NOVFigure 43-2. Daily Force Index—The Second Screen of TripleScreen
The 2-day EMA of Force Index is one of several oscillators that can workas the second screen of the Triple Screen trading system. Force Indexmarks buying opportunities when it falls below its centerline. It marksselling opportunities when it rallies above its centerline.
When the weekly trend is up, take only buy signals from the dailyoscillator for entering long positions. When the weekly trend is down,take only sel! signals for entering short positions. At the right edge of thechart, the weekly trend has turned down. Wait for a rise in Force Indexin order to sell short.
 
the centerline. When the weekly trend is down, daily Elder-ray signals to goshort when Bull Power rallies above zero and then ticks back down.
Stochastic (see Section 30) gives trading signals when its lines enter a buyor a sell zone. When weekly MACD-Histogram rises but daily Stochasticfalls below 30, it identifies an oversold area, a buying opportunity. When theweekly MACD-Histogram declines but daily Stochastic rises above 70, itidentifies an overbought area, a shorting opportunity.
Williams %R (see Section 29) needs a 4- or 5-day window to work withTriple Screen. It is interpreted similarly to Stochastic. The Relative Strength43. TRIPLE SCREEN TRADING SYSTEM 241
Index does not react to price changes as fast as other oscillators. It helps withoverall market analysis, but is too slow for Triple Screen.
Third Screen—Intraday Breakout
The first screen of the Triple Screen trading system identifies market tide ona weekly chart. The second screen identifies a wave that goes against thattide on a daily chart. The third screen identifies the ripples in the direction ofthe tide. It uses intraday price action to pinpoint entry points.
The third screen does not require a chart or an indicator. It is a techniquefor entering the market after the first and second screens gave a signal to buy
* or sell short. The third screen is called a trailing buy-stop technique in
uptrends and a trailing sell-stop technique in downtrends (Figure 43-3).
When the weekly trend is up and the daily trend is down, trailing buy-stops catch upside breakouts. When the weekly trend is down and the dailytrend is up, trailing sell-stops catch downside breakouts.
Triple Screen Summary
Weekly Trend Daily Trend Action OrderUp Up Stand aside NoneUp Down Go long Trailing buy-stopDown Down Stand aside NoneDown Up Go short Trailing sell-stop
When the weekly trend is up and a daily oscillator declines, it activates atrailing buy-stop technique. Place a buy order one tick above the high of theprevious day. If prices rally, you will be stopped in long automatically whenthe rally takes out the previous day’s high. If prices continue to decline, yourbuy-stop will not be touched. Lower your buy order the next day to the levelone tick above the latest price bar. Keep lowering your buy-stop each day untilstopped in or until the weekly indicator reverses and cancels its buy signal.
When the weekly trend is down, wait for a rally in a daily oscillator toactivate a trailing sell-stop technique. Place an order to sell short one tickbelow the latest bar’s low. As soon as the market turns down, you will bestopped in on the short side. If the rally continues, keep raising your sellorder daily. The aim of a trailing sell-stop technique is to catch an intradaydownside breakout from a daily uptrend in the direction of a weekly down-trend.{ \]{Pal
ee
Force Index2-day EMAWeekly MACD buy
 
Weekly MAZD sell
Figure 43-3. Trailing Buy-Stop—The Third Screen of TripleScreen
Weekly MACD-Histogram has turned up in mid-September. When thefirst screen points up, every decline of the second screen-the 2-day EMAof Force Index-marks a buying opportunity.
. Force Index falls below its centerline. Place a buy order for tomor-row 1 tick above the high of day a.. The decline continues. Lower the buy order to 1 tick above thehigh of bar b.. Bought at the opening. Place a stop at the low of bar b. The newhigh in Force Index shows that the rally is strong, likely to continue.. Force Index falls below its centerline. Place a buy order at the bar'shigh.. Bought when prices rallied above the high of d. Place a stop at thelow of bar d.. Force Index falls below its centerline. Place a buy order at the bar'shigh.. Decline continues. Lower the buy-stop to within 1 tick of the highof bar g.. Bought when prices rallied above the high of g. Place a stop at thelow of bar g.. Force Index falls below its centerline. Place a buy order at the bar'shigh.j. Decline continues. Lower the buy-stop to within 1 tick of the highof bar j.. Bought at the opening. Place a stop at the low of bar j.|. Gold opens lower and hits the protective stop. It is important to usestops because no indicator is perfect.
 43. TRIPLE SCREEN TRADING SYSTEM 243
Screen Three: Use the trailing buy-stop technique when the weeklytrend is up and the daily oscillator is down. Use the trailing sell-stoptechnique when the weekly trend is down and the daily oscillator is up.
Stop-Loss
Proper money management is essential for successful trading. A disciplinedtrader cuts his losses short and outperforms a loser who keeps hanging onand hoping. The Triple Screen trading system calls for placing very tightstops.
. As soon as you buy, place a stop-loss order one tick below the low of thetrade day or the previous day, whichever is lower. Once you sell short, placea protective stop-loss one tick above the high of the trade day or the previousday, whichever is higher. Move your stop to a break-even level as soon as themarket moves in your favor. Afterwards, the rule of thumb is to move yourstop to protect approximately 50 percent of paper profits (see Section 48).
The reason for using such tight stops is that Triple Screen trades only inthe direction of the tide. If a trade does not work out fast, it is a sign thatsomething is fundamentally changing below the surface of the market. Thenit is better to run fast. The first loss is the best loss—it allows you to re-examine the market from the safety of the sidelines.
Conservative traders should go long or short on the first signal of theTriple Screen trading system and stay with that position until the major trendreverses or until stopped out. Active traders can use each new signal fromthe daily oscillator for pyramiding the original position.
A position trader should try and stay with a trade until the weekly trendreverses. A short-term trader may take profits using signals from the secondscreen. For example, if a trader is long and Force Index becomes positive orStochastic rises to 70 percent, he may sell and take profits, then look foranother buying opportunity.
The Triple Screen trading system combines different timeframes and sev-eral types of indicators. It uses a trend-following indicator with the long-termcharts and a short-term oscillator with the intermediate charts. It uses specialentry techniques for buying or selling short. It also uses tight money man-agement rules.244 TRADING SYSTEMS44, PARABOLIC TRADING SYSTEM
The Parabolic trading system was described in'1976 by J. Welles Wilder, Jr.It was named after the pattern of its stops during runaway moves, whichresembled a parabola. The Parabolic system is now included in many soft-ware packages.
Parabolic aims to catch trends and to reverse positions when trendsreverse. Its unique feature is that it responds to the passage of time as wellas to changing prices. Most traders focus on prices but ignore time (seeSection 36).
How to Construct Parabolic
Parabolic is a reversal system, designed to keep a trader in the market all thetime. When Parabolic stops you out of a long position, it tells you to go shortat the same price. If it stops you out of a short position, it tells you to go longat the same price and time. This method worked well during the inflationarymarkets of the 1970s, but has led to many whipsaws in later years. NowParabolic should be used selectively, only when markets are trending.Parabolic is based on a good old rule — move your stops only in the direc-tion of the trade and never against it. If you are long, you may raise yourstops but never lower them. If you are short, you may only lower your stops.Parabolic stops are set daily, using