Ask any momentum trader out there and they will tell you that the king of all bull patterns is undoubtedly the Parabolic Curve. This has been one of the best setup that have turned aspiring traders to millionaires over the years. It provides up to 4 digit percentile gains in a matter of weeks to months thus making it the setup of choice for momentum traders. However, riding this play is a matter of timing and chance as it will only appear on major bull markets or through market outlier stocks with very strong catalysts.
In this post we'll dissect how and why a Parabolic Curve forms and the strategy that can be used to profit from one.
What is a Parabolic Curve?
A Parabolic Curve is generally a strong uptrending move comprised of several strong breakouts in between higher base price consolidations. When maintained by aggressive institutional buying, the price forms a ladderized ascent known technically as a Parabolic Curve.
The chart above shows a classic Parabolic Curve pattern. Notice that the price breaks out with a spike in volume. After which, it consolidates above the breakout point. This repeats 3-5 times depending on the strength of institutional buying. The goal here is to know the exact entry and exit signal to ride the bulk of the rally.
Why does a stock go Parabolic?
The short answer to this question is DEMAND. Overwhelming demand from the investing public causes the price to spike up dramatically. If the buying is sustained over a period of days to weeks, a Parabolic Curve is formed.
There are a number of reasons why demand for a stock spikes up. Here are some of them:
Overall market is uptrending allowing increased appetite for risk.
Speculation on strong fundamental catalysts. (Merger, backdoor listing, acquisition, strong earnings growth, company expansion, new business product)
Stock is announced to be listed on a foreign or local index allowing more volume to pour in.
Insider trading. Related to number 2.
How to Enter and Exit a Parabolic Curve?
Every momentum move starts and ends at EMA9
To demonstrate some technical buy and sell signals, we'll use these two charts as references:
Chart A
3 base Parabolic Curve
Chart B
4 base Parabolic Curve
1.The Entry Point
When a stock breaks out or spikes after a long consolidation, there is no way to tell if that will turn out to be a Parabolic Curve or not. You'll only notice it when its already at Base 2 or 3 of the rally. At the onset, it can turn out to be a simple swing move or just a classic pump and dump. So as a risk management element, momentum traders use the EMA9 line as a momentum indicator to know when to buy and sell.
Here are some buy signals typically used for a Parabolic Curve:
Enter as the price breaks out above the EMA9 line (pivot move). When volume surges as it goes above EMA9, then the price has a high chance of following through. Refer to Chart A
Enter as the price breaks out from a resistance level in an ongoing consolidation. Refer to Chart A and B
If you missed the initial entry, enter once price bounces from EMA9 and recovers. Refer to Chart B
When you have bought the stock, you will now monitor how it moves above EMA9. Parabolic Curves will consolidate always above EMA9. They may dip below it within the day but price will always close above EMA9 intra day or the next day. Failure to do so means that the setup is NOT in momentum and will therefore not materialize as a Parabolic pattern. This is why momentum setups always start and end at EMA9.
2.The Exit Point
The hardest part of riding a Parabolic Curve is knowing when to sell. When you are sitting with 100% - 1000% gains, euphoria and greed kicks in. You are high in the clouds and it is as if you feel that this rally will never end. This is what momentum traders face emotionally when they are fortunate enough to ride this monster pattern.
Here are some sell signals typically used for a Parabolic Curve:
Sell when price breaks down below EMA9 with big volume. Refer to Chart A and B
Sell when the pattern forms a bearish divergence in the daily timeframe. Refer to Chart B
Sell when RSI hits 90 - 95. This is case to case basis since most Parabolic Curves will recover from a pullback from RSI 90 and rally even higher. Refer to Chart A and B
Sell when happy. It is your money. If you are happy with your profit and you want to move to another play then hit that sell button to lock your gains.
These technical buy and sell signals serve as a guide to navigate the price. Without proper signals, traders will just be guessing price action back and forth and make impulsive decisions.
In a Nutshell
It is every trader's dream to ride a Parabolic Curve. However, the rarity of this pattern is what makes it hard to come by. But when it does start to form, knowing the exact technical signals will enable you to ride the meat of the rally. Everything boils down to constant market analysis, recognizing the opportunity and acting on it through disciplined execution.
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