After doing our BPTH trade review, we got a ton of questions about parabolic moves and how to trade them. A parabolic move is a setup you will see frequently in all financial markets. It offers a great opportunity for traders who understand how to trade them, as they offer the potential to make huge returns in a short period of time. It is also potentially a risky setup if you do not have the right strategy or timing. It is crucial you understand what a parabolic move is and strategies to trade them in order to profit from these opportunities:
What is a Parabolic Stock?
A parabolic stock is a stock that has seen an exponential increase in its stock price. A parabolic move in a stock is defined by a speed up in price appreciation, relative to prior price action. Let’s stay a $50 stock increased $1 in value every day for 5 days. On the 6th day, it increased $5 in value on that day alone. This would be defined as parabolic move because we have a speed up in price increase relative to prior price action. A parabolic move is a short term fluctuation in price. Parabolic moves will often be followed by a sharp decline in price value. As the price action speeds up, longs become more likely to take profits and short sellers become more likely to enter the market because both know a sharp decrease in price action is coming.
Parabolic Stock Example
BPTH is a great example of a parabolic stock. Take a look at its daily chart, and notice how it had an exponential increase in value over just a day of trading:You can see how on March 6th it ran from about $7 to $14 a share. That would not be considered a parabolic move because just made a move from $3 to $9 a few days before. This is not a speed up relative to prior price action. You would not want to be shorting into a move like this for that reason. On the 7th, we witnessed the parabolic move take place. The stock ran from around $18 a share to a high of around $73 in just 2 hours!
How to Trade Them
It is useful to understand a parabolic move from the perspective of long and short seller. A long will recognize when a parabolic move is taking place is to know when to start taking profits on their position. You also want to recognize this pattern as a time to NOT put on a long position.A short seller will want to recognize this pattern as a potential shorting opportunity. If you can time your entry correctly (and find shares to short), you can make a huge return in a short period of time. This is not a strategy I would recommend for new traders to take, as timing the backside of these moves is very difficult. Getting in too early on the front side of these moves can have disastrous consequences for your capital.