What are Parabolic Stocks? A Complete Guide to Trade with Parabolic Moves
A parabolic stock is one of the effective stocks whose price sharply rises within a short span. Before stepping into the stock market, learning how to trade parabolic stocks wisely can help manifold the profits to your stock trading account.
Parabolic price moves follow a price action pattern that is repeated again and again in the financial market. It implies that you have the opportunity to make stock trading beneficial if you pick the right stock.
A parabolic pattern is most commonly occurring in the stocks of younger and small-cap companies. It includes penny stock companies or the stocks of other class assets, for instance, commodities and cryptocurrencies.
In this article, we will thoroughly define what parabolic stock is and how it occurs. If you want to know what causes this trend, stick to us till the end.
What are Parabolic Stocks?
The "Parabolic stock" is the term that describes a particular form of price action move instead of a particular stock. Any stock can be a parabolic stock when it shows a major and sharp rise in price. Generally, this move takes the stock to a new and particularly all-time higher position.
For instance, if a stock has been publicly traded for around 20 years and the price action never happens to increase more than $ 5 per year. It is called a parabolic move, and stock when the price suddenly increases 200-500% over a couple of days or weeks.
A parabolic move occurs for a short period, a dramatic upsurge in peace followed by an equal yet gradual decline. Due to this, a parabolic move is often taken as a short-term price hype. Traders must know parabolic stocks cannot be found daily and only occur during perfect conditions. Once the stars align, the returns can be tremendous.
Causes of Parabolic Move in Stock Price
The sudden rise and decline of price are not meaningless. There are some key reasons for parabolic moves in the stocks.
Every cause has a different impact and gives a different push in terms of the peak. Therefore, it is crucial to comprehend the environment of the stock you are analyzing and to avoid interpreting signals in a non-optimal way.
Here are some causes that give smooth stocks a prominent spike. Let's explore!
In the last year, we have experienced social media orchestrating short squeezes. Large and well-known social media group traders conspired to bid up the stock price. The most common example has been Wallstreetbets, which contains 12.5 million "degenerates." With such a large number of members, this group has a strong ability to move certain stocks.
It was especially experienced in stocks of high short interest, where many traders were shorting the stock for a profit. These stocks typically have a small number of shares available to be traded, which is referred to as a "float." The stock can short squeeze when you combine high short interest, low float, and intense buying pressure.
Hence the short sellers had to buy stocks and close out their position to prevent catastrophic loss. Their buy orders create more upward pressure on the stock price. Ultimately, the price of the stock will become parabolic.
Parabolic stock moves are sometimes the result of the social media hype of the company. Some other platforms that influence stocks are news channels and influential people (think Elon Musk).
M and A deal:
Another common cause is that stocks experience parabolic patterns after merger deals are announced.
For instance, if a stock company is trading at $30, it will make a parabolic move when a well-known or big fish announces that it will buy these stocks for $40 or more. In this situation, the parabolic move can also be witnessed in other related companies that could become easy targets.
Many problems make these moves not as attractive to the trader.
These moves typically happen quickly and can be hard to catch.
The magnitude is typically not as large as a short squeeze.
The move can also happen based on a rumor, and if the deal doesn't go through, the stock can be sent back to the original price.
The most recent example was with Twitter when Elon Musk attempted to buy the company. The rumor sent the stock soaring almost 100% from the lows, but later the deal failed. When the deal dropped, so did the stock, which shows just how dangerous these plays can be.
Sometimes, the name of a company is enough to create a tide in the market. A new and striking announcement by a company can lead to a major parabolic move.
For example, if a company like Mercedes announces a new model of car which is well-appreciated by investors and analysts, the stock can show a considerable jump. Similarly, if mobile phone companies like Apple or Samsung announce a major upgrade in their mobiles or may introduce a brand-new feature, stock can also have a parabolic move.
The most popular stock to play from the news is in the biotech sector because the potential for a new FDA-approved product can be huge for the company. Most day traders will focus on cheap biotech stocks and watch the news closely.
Recently, a stock called NERV ran 170% over the last two days on news of a new FDA-approved product. Traders must be warned that cheap and new stocks are extremely dangerous to trade and own.
These stocks must be approached with caution because the companies will likely sell their shares on the open market during these events to raise capital which can drive the stock down fast.
The Fed decision is another notable sudden price spike of a linear stock. A small-cap company stock or sometimes big companies' stocks also have a major jump after the policy change by the federal reserve.
For instance, if the Fed becomes dovish, it can result in sudden hype in shares of particular companies. Generally, growth companies fail to perform when the rates and value stocks lag.
These moves have been very common recently, as the federal reserve is attempted to raise interest rates at a historic speed. Whenever the chairmen speak on plans, expect the market to whiplash in every direction. Traders need to get ready for these days and protect themselves accordingly.
In the picture below, the market sank 7 points in just the first two hours after the Federal Reserve made comments on the markets. While no rates were changed, just by speaking on plans can, the market completely flip directions.
Government Policy Change:
The fortune and stock price of the company also majorly depend on legislation or decisions.
For example, the stocks showing linear growth can experience a parabolic upsurge in the stock price of companies in the coal industry. It is an industry that has been all but legislated out of business over the recent decade.
Government has a great role in the shares as major government subsidies have created parabolic moves for many renewable energy companies.
These are some specific reasons, but the list does not end here. There are some other causes why a stock may have a parabolic. Sometimes it happens when a new and respected investor such as Warren Buffett buys shares and announces a new trade or investment.
When it happens, many institutional and retail investors tend to buy the same stock. However, the downward graph also works similarly. When these investors withdraw their amount suddenly, it affects many shares, making them decline to half the amount. For instance, when Elon Musk sold his shares, the cryptocurrency faced a major decline.
Moreover, it can make a parabolic pattern when the company is added to an index, such as S&P 500 and Nasdaq 100. This is because inclusion will lead to more purchases by funds that keep an eye on these indices.
How to Find Parabolic Movers?
There are many methods to spot companies making parabolic moves. Below are a few of the most popular scans:
Scan for the stocks with the largest moves
Scan for stocks with high short interest
Scan for stocks with a low float and high short interest
Tradingview is an excellent platform that provides most of these scans for traders and customizable scanners. In the picture below, you can see the top movers and top volume scans. Some stocks on these lists have moved well over 20% in one day!
Parabolic Stock Chart Analysis
Parabolic is one of the most unpredictable trading sources with fluctuating price action. It jumps sharply with a trade session. So here are several things generally seen about the trade.
For instance, you can take the example of wall street or Annovis stock which rose to $98 from $28. Regardless of the high peak, it did not remain at the same point for a long time. It lost some of these gains and ended up at $60. This is how parabolic moves work.
The other most prominent example of parabolic stocks is GameStop, which experienced a parabolic move in the first half of 2021. The stock rose significantly to $480 and suddenly declined again. It happened because some earlier buyers made a profit.
How to Trade Parabolic Stocks?
It is essential to comprehend a parabolic move from the longs and short sellers' perspective for profitable decisions. A long seller will be able to recognize when the parabolic move will take place to know when to enter and begin generating profits on their position.
You may also need to recognize this pattern as a time not to put on a long position. Similarly, a short seller will be willing to recognize this pattern as a potential shorting opportunity.
However, here are the four parts of the parabolic move:
The Slow Advancement:
It is the easiest part to start comprehending the cycle. Here the stock is in a solid uptrend. There will generally be many bearish sentiments as a small-cap company is about to make a significant run-up. However, short sellers get trapped as it pulls back, gets back, and then goes higher.
The Declining Peak:
Here begins the game of fear of missing opportunity. All the traders who think the peaked stock is too high to buy get tired of missing out on opportunities.
They begin chasing, and early shorts get liquidated by their brokers. Here the smart investor or traders begin to sell out their positions.
It is visible in the example of AMC stock:
It is the third part of parabolic stock trading. The stock has reached its maximum peak. This is the point where short sellers focus on their payday. It is a ritual of parabolic stocks to take the stairs to go up while showing the decline with the elevator's speed.
For instance, a stock named GME lost almost 80% of its value in one day after reaching maximum reach. As a short seller, this is a setup where you would be too late or too early. However, this kind of trading is not suggested for beginners willing to invest a big amount for trading.
The Dead Cat Bounce:
"Dead cat bounce" is a phrase in the trading world that refers to a short-lived recovery of stock prices after a significant decline.
It is a rising indicator in parabolic curve conditions. After the stock has aced its peak, it will experience a massive rally again at some point. Not all back to highs, but a temporary move.
For instance, the stock GME bounced back almost 200%, from $100 to $300, after declining. Parabolic trading is a bit difficult. Like a trader trying to short the top, he would rather be a bit early or too late.
After the dead cat bounce, the trade will gradually begin to decline to the same point. After this event, it is non-profitable as it fades slowly and generally requires weeks or months.
What are the Expected Outcomes of Parabolic Stock?
The outcome can be unpredictable sometimes. However, there are two basic outcomes when a parabolic move occurs.
First, the stock can integrate and form a bullish flag and keep going with the rising trend.
Secondly, the stock can experience a fall or retreat and return to where it was before.
If you witness a bullish consolidated move, you should buy the stock with the hope that it will keep rising. On the other hand, if you can't spot any significant pattern, short it with the expectation that it will drop.
Still, you must be careful about shorting parabolic stocks because short squeezes usually occur. Traders always suggest reducing your risk by sizing your position adequately and putting a stop loss on all trades.
The stocks are not ideal for beginner investors, but it does not mean experienced traders cannot leverage them. Here are some inevitable advantages of parabolic stock:
It is useful in tracking the moves that evolve suddenly. It happens mostly where large panic purchases cause prices to increase even overnight.
It is utilized to spot increasing trends.
The parabolic stock offers traders particular entry and exit points depending on the parabolic pattern being traded.
The parabolic curve is the best efficiently utilized with price or leverage.
While evaluating advantages, it is not wise to ignore potential rises:
It isn't easy to recognize the trend in early periods of trend.
As a buyer, if you buy the stock too late when it has already reached the peak with a vertical curve, you need to be well aware that the trade price is about to fall, and the fall will be costly.
Parabolic trading is relatively easy, but a minor mistake can lead to a significant loss. Every investor or buyer wants an attractive trading offer, a huge sum of money, in a short period. It is ideal for both long-term and short-term sellers if they have experience in trading.
Entry and exit at the right time are crucial for a beneficial trade. Otherwise, trading will turn into reverse trade. If you are confident about your stock chart analysis skills and trading strategies in trading, the parabolic move is worth considering.
this article has covered causes, strategies, and expected momentum in stock price action in the stock market.