Parabolic Stocks: Definition and Trading Strategies with Examples

Learning how to trade parabolic stocks wisely can add a lot of profits to your stock trading account. Parabolic price moves constitute a price action pattern that is repeated time and again in the financial markets. That means that you have opportunities to make a stock trading fortune time and time again if you pick the right stocks.

Parabolic stock price moves are more likely to occur with the stocks of younger, small-cap companies. That includes penny stock companies or stocks related to alternative asset classes, such as commodities (e.g., gold and silver) or cryptocurrencies.

In this article, we’ll clearly define what a parabolic stock is and look at the factors that cause stocks to go parabolic. We also offer you some guidance on how to profit from day trading and swing trading a parabolic stock pattern, along with advice on how to minimize your risk exposure easily.

What is a Parabolic Stock?

Strictly speaking, there’s really no such thing as a parabolic stock. The term “parabolic” actually describes a particular kind of price action move, rather than a particular kind of stock. Any stock can become a “parabolic stock” when it experiences a sharp, sudden increase in price. Usually, a move that takes the stock to a new and significantly higher all-time high.

For example, if a stock has been publicly traded for 20 years. The price never increased by more than $2 per year suddenly doubles in price, from $40 to $80, in just a few trading days. Then, that stock just became a parabolic stock. A parabolic move is a short-term, dramatic upsurge in price, frequently followed by an equally swift decline. For this reason, parabolic moves often appear as very short-term price spikes.

A parabolic stock is any stock whose share price increases exponentially over a very short period of time.

The weekly stock chart of Helios & Matheson Analytics Inc. (OTC: HMNY) below reveals the stock going parabolic in mid-October, 2018.

parabolic stock hmny

What Causes a Parabolic Move in a Stock Price?

The possible causes of parabolic moves in a stock are virtually endless. However, there is an identifiable list of the most common causes of parabolic stock moves:

Unexpected, Highly Positive Company News

When a company catches the market by surprise with sudden, unexpected, and very favorable news – such as securing a large government contract, or issuing an earnings per share (EPS) report that’s more than double analyst expectations – its stock price may take off like a rocket to the moon.

Government Policy Changes that Affect Financial Markets

The fortunes of many industries can be hugely dependent on government policy decisions or legislation. Examples of stocks experiencing the opposite of a parabolic upsurge can be seen in the stock prices of companies in the coal industry – an industry that has been all but legislated out of business over the past decade.

On the other end of Wall Street, major government subsidies have created parabolic moves for some renewable energy companies.

Social Media Campaigns

2021 has been the year of the social media orchestrated short squeeze. Large social media groups of retail traders have successfully conspired to bid up stock prices. That was especially true for stocks with high short interest where a lot of traders were shorting the stock. A significant increase in a stock’s price creates what’s known as a “short squeeze.”

Short sellers are forced to close out their positions to avoid catastrophic losses. Their market exits through buy orders create more upward pressure on the stock price. Eventually, the stock’s price rise can become parabolic.

Parabolic stock moves can also result just from social media hype about a company. True or not, if it’s widespread enough to draw in large numbers of retail investors.

Other Causes

Among the other possible triggers of a parabolic move are things such as the announcement of a major merger or acquisition deal, the stock being touted by well-known investment experts (e.g., Warren Buffett), or the stock being added to a major market index. When a stock is included in a market index, substantial numbers of shares are bought by portfolio managers of index funds.

How to Trade Parabolic Stocks – Example: AMC

Let’s start with a cautionary note: Parabolic moves offer you the potential to garner large returns in a very short period of time. However, they also pose high risks. If you trade parabolic stocks, it’s essential that you exercise self-discipline and careful money management.

Don’t try to trade parabolic trends without using a stop-loss order to help limit your risk.

Timing is absolutely critical to profitable parabolic stock trading. Because the stock’s price is changing so dramatically and rapidly, being a little too early or too late in either market entry or exit can turn trades that, well-timed, could make a fortune into a financial disaster.

The daily chart of AMC Entertainment Holdings Inc. (NYSE: AMC) below shows a perfect example of a parabolic stock move. It also reveals some key elements to parabolic investing profits.

amc parabolic stock move

First, note how quickly a parabolic stock trading opportunity comes and goes on Wall Street. The whole moon shot up from around $10 a share to nearly $75 a share takes place over just seven trading days. In fact, the bulk of the move occurs over just four trading days – a very short period of time. So if you want to try to ride a parabolic rally, you have to act fast – “He who hesitates is lost.”

Buying a Parabolic Stock Price Rise

A good buy-in point – a reasonable time and place to have bought into the mega-rally in AMC – was where and when the stock gave a clear signal that it might be headed substantially higher.

This occurred on day three of the rally. AMC took out a significant resistance level – the previous high close for the year of $19.90 (shown on the far left side of the chart).

An investor buying in at that point would have had the opportunity to cash in on nearly the whole upside move. Moreover, he would have been able to reasonably limit their risk with a stop-loss order placed a little under $10 a share.

Where to take your profits? A good bet would have been the close on June 2nd, the day the parabolic move hit its high just above $72 a share. A tip-off, later proven reliable, that the stock might have peaked is the long, top-side candlestick tail on the long, green (up) candlestick showing the day’s price action.

The stock made its longest and highest surge that day. But, unlike previous days in the rally, closed substantially below the high of the day. Trading had also left a sizeable gap with the June 2nd open – and securities notoriously love to retrace and fill in gaps.

Short Selling a Parabolic Stock

More experienced traders know that short sellers are often the big winners in parabolic stock trades. Many parabolic moves up are completely undone in subsequent trading. That is, the stock falls all the way back to its price level before the parabolic rise. In AMC’s case, it hasn’t (yet) declined all the way back to $10 a share, but it has retraced about 50% of the move up, and filled in the June 2nd gap.

A short sell could reasonably have been initiated at the close on June 2nd, around $52, with a stop-loss above the $72 high.

More conservative traders might have waited for the clearer signal of a bearish trend change that came the next day. On June 3rd, when the stock failed to make a new high, once again left a long, top-side candlestick tail, and suffered a serious down day, there was a potential short entry.

For a short seller exit strategy, you might have simply moved your stop-loss order down a bit to lock in part of your profits, and then held on in case the stock declined further. Some short sellers would likely have closed out their nicely profitable position in mid-August. There the down trend line extending from late June to early August was broken with a strong up day that closed clearly above $35.

The key point to take away here is that one doesn’t make money by just blindly buying or selling parabolic stocks.

Instead, the smart trader looks for clear technical analysis indications of likely future price movement provided by:

  • Price action,
  • Candlestick formations, or
  • Levels of support or resistance.

With AMC, there were pretty clear signals telling buyers to exit and short sellers to enter just from the stock’s price action evidencing the typical end to a parabolic rally:

A “blow-off” top, accompanied by high volume. Such a peak in volume is often a reliable signal of trend change.

Another technical analysis tool that can be useful in evaluating parabolic trading opportunities is a momentum indicato. For example, the MACD, when it turns to the downside although the price continues higher.

Therefore, a momentum indicator divergence from price is another signal that the parabolic rally may be ending and the parabolic “crash” beginning.

Parabolic Stocks: Summary

Parabolic stocks are attractive because they offer the possibility of realizing what every investor wants – making a LOT of money in a SMALL timeframe. And they offer good trading opportunities for both long and short sell trades. The typical parabolic pattern is a sharp rally, followed by a somewhat slower decline. The keys to profiting from a parabolic stock trade are:

  • Use technical indicators to help you get into the market early on in either buying the rally or shorting the crash
  • Use stop-loss orders to limit your risk
  • Don’t be greedy! – If you catch even half of a parabolic stock move, you’ll make a really nice profit on your trade. Don’t let greed tempt you into lingering in the market too long, only to see your gains melt away.

About the author: Alexander is the founder of daytradingz.com and has 20 years of experience in the financial markets. He aims to make trading and investing easy to understand for everybody, and has been quoted on Benzinga, Business Insider and GOBankingRates.