Timing the trend change and profiting from it is easier said than done. If you cannot manage risk and cut a loss quickly it’s very possible to blow up if you’re being stubborn on the wrong side of these strong trends. If you can manage your risk and know how to time your entry, you can sometimes make 5-10 times your risk on these setups. Here are 3 ways you can increase the probability of timing a reversal to the long or short side on a parabolic setup.
Watch for Parabolic Price Action
A lot of traders make the mistake of trying to short or long a trending stock when it is just slowly grinding up or down. You don’t want to take a reversal trade on a stock until it starts to get parabolic, or is speeding up relative to prior price action. Look at the HMNY price action from the middle of September to the beginning of October. It’s up 300% or so in three weeks, but it is in an orderly trend. Every time it’s had a pullback it has held up in the higher part of its range. Once it started to gap up and the expending daily bars, it’s giving us some real extension for better risk versus reward. However, you don’t just want to start shorting full size once you get the speed up of price action. It is sometimes best to wait for confirmation on the daily chart that the trend is over.
Wait for Daily Confirmation
On strong daily trends like HMNY, it is sometimes best to just wait for the daily to tell you when the trend is over. Once you get the parabolic look and a big doji like we did with HMNY, that is a major sign of buyer exhaustion. When there is so much downside available, you don’t have to catch the exact top to make some nice gains. If you waited till the first red day after the big doji daily candle and had a 28 average for your short, you still could have easily made 5-10 points a share over the next couple days.
Don’t Be Afraid to Take A Small Loss and Retry
It is very rare that you will catch the turn of the trend on your first attempt. The risk reward is so good on most of these plays that taking a small loss should mean nothing. Once you do catch the turn, you should make 5-10 times your risk on huge parabolic plays like HMNY. You cannot blow your daily max loss on one attempt on these kind of plays (for more advice on using a daily max loss check out this article). You have to leave yourself physical and mental capital so you will be there when the trend ends.
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