Bulls on Wall Street
Who isn’t talking about the massive $ AMC squeeze? Parabolic stocks like $ AMC change lives for better and for worse. Fortunes are made and lost with these names.
This pattern is predictable and occurs again and again in the financial markets.
They offer AMAZING opportunities for traders who know how to trade.
They have the potential to generate huge returns in a short period of time. But the same amount of money can be lost just as quickly. You need the right strategy and timing.
This blog shows you how to trade them:
What is a parabolic stock?
A parabolic stock is one that has seen its share price rise exponentially. A parabolic movement of a stock is defined by an acceleration of the price increase in relation to the previous price movement. As an example, consider trading stocks at $ 50 per share over 7 days:
Day 1: $ 50
Day 2: $ 51
Day 3: $ 53
Day 4: $ 58
Day 5: $ 68
Day 6: $ 98
Day 7: $ 62
This would be defined as a parabolic movement as we have an acceleration in the price increase compared to previous price movements. A parabolic movement is a short-term fluctuation in price.
Parabolic movements are often followed by a sharp decline in price. As price action accelerates, long positions become more likely to take profits and short sellers are more likely to enter the market because both know price action will decline sharply.
Example of a parabolic stock
$ GME before is a great current example of a parabolic stock. Take a look at the daily chart and see how it rose exponentially in value in just a few weeks at the end of January:
You can see how it went from $ 10 per share to nearly $ 500 in just a few weeks!
How to trade them
It is useful to understand parabolic movement from the perspective of long and short sellers. A long will recognize when a parabolic move is taking place to know when to get in and when to start taking profits from your position. You also want to recognize this pattern as a point in time when you are NOT going long. A short seller will want to recognize this pattern as a potential short selling opportunity. Here are the 4 parts of a parabolic motion:
The slow progress
This is the easiest part of this cycle, this part is. The share is in a strong upward trend. There will usually be a lot of bearish vibes as a junk company makes a big run-up. Short sellers are caught when they pull back, get bought out, and then grind higher.
The blow-off top
This is when the “FOMO” peak begins. All of the retailers who thought it was too high to buy in are sick of missing out. They start hunting and early shorts are liquidated by their broker. This is when the smart money starts selling its position. We are seeing this at $ AMC right now:
After all, the top is in there, as supply exceeds demand. This is where short sellers can get their payday. Parabolic stocks take the stairs up and the elevator down. $ GME fell nearly 80% in a single day once it hit the top. As a short seller, this is a setup you’d rather put in too late than too early. This is not a beginner’s trade to try large sizes.
The Deadcat bounce
After the stock hits its high, the stock will experience a massive rally at some point. NOT back to highs but a temporary move. You can see $ GME jump nearly 200% from around $ 100 to $ 300 after it crashed. It’s difficult business. As on the front, when trying to keep the top short, you’d rather be a little late than early.
After the dead cat impact happens, the stock usually slowly starts disappearing again where it came from. After the dead cat hit, we, momentum traders, don’t care as the fading is slow and usually takes weeks and months.
Present Parabolic Stock: $ AMC
So what happens to $ AMC next?
We have no idea. In retrospect, when you see parabolic motion, it’s easy to tell where to buy and where to sell. But now look at $ AMC: does anyone know where the top is? Does anyone know when it will crash?
We know one thing for sure: at some point it will follow exactly these cycles. There will be a big crash at some point. And then you have a dead hop. The Bottom Line: Aggressively manage your risk by trading these names. You can end your trading career in hours if you are stuck on the wrong side of the trend.
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