How are the parabolic movements in the Stock Exchange?
Parabolic market example at its best: the Nasdaq bubble
One of the most recurrent occurrences in the stock markets is the exaggerated movements of prices in the advanced stages of the large bull markets of all assets.
Let’s say that these movements are formed when the great mass goes to the market in question attracted by the gains that the market has accumulated previously.
These parabolic movements of the price are usually preceded by a quieter rise and with a lower “slope”, referring to that term here as if it were a mountain pass type Tourmalet, Mortirolo or Angliru.
When the parabolic movement begins to produce, the slope and the “speed” rise. That is, it is as if the price of the asset in question rose at a higher rate or more percentage in the same time as before.
In this way we have to form those graphs in which we can draw the rise with a kind of parabola that goes up in inclination and that in the end usually ends in a great explosive movement to the downside.
Examples of this are found in all the assets and markets of the world, whether raw materials, stocks, currencies, cryptocurrencies, and even bonds.
How are these parabolic movements interpreted by experts?
Surely if you have visited some websites talking about this topic you will have seen that they mention that these parabolic movements present good opportunities to go short on them because it is the closest time to correction, and that it is not a good idea to get long when a market is going up that way.
Honestly, I think that this approach is not appropriate to face the already difficult markets, although we must qualify some things first.
The affirmation that it is not a good idea to get long when the parabolic movements are in progress is, to a certain extent, true, but not entirely, because if we go to the examples that history gives us – and it gives us many – many times these movements can last and give us further advances of 100, 200 or 300% of the price, under conditions that are also excellent for trading upwards. In this case it will obviously be necessary to try to protect ourselves with stop loss orders as close as possible.
I’m going to put an example:
Parabolic movement of Nvidia in 2016
This action was having a fairly constant and strong upward movement in 2015 and in 2016 it accelerated by increasing the rate of rise (converting its rise to parabolic) in the middle of the year.
Imagine that you are one of those who think that it is not a good idea to enter longs because the price has entered a parabolic phase.
Well, suppose we are in that moment, in the 70 dollars and we think that the most normal thing is that a bear market comes to correct this strong rise.
What happened to that parabolic movement?
Well, the same continued to accelerate further, first at $ 100 and later at $ 200 and higher still, multiplying the price by almost 4 from the moment we saw that the price advance was already parabolic.
In the end, we lost some absolutely great possible operations.
And why so great?
Well, because these types of movements are what make you earn enough money in a smaller period. That is, it is in these moments where there is speed, that our bullish operations can give us clearer benefits.
In this sense, I can tell you that it is better that this asset should go up 200% in two years than that it should go up 200% in 20. The second case is not so profitable so to speak.
Are parabolic movements in trading risky?
Of course they have a lot of risk.
This case of Nvidia that I am telling you was a good example that parabolic movements can last much longer than we think but in other cases the same thing does not happen, and most importantly, almost all major collapses are followed by a large parabolic movement. What is really difficult here is to know the moment in which the final parabolic movement takes place. That’s very complicated, not to say impossible, by the way.
The only thing we can know is that the more the price has gone up and the more parabolic-type movements we have had, the closer is the final correction.
More examples of parabolic movements in Forex
These parabolic movements usually occur in Forex but not as often as we can see them in other markets as stocks.
For example, it is not common to see large parabolic movements in large Forex pairs. These pairs, type EURUSD, GBPUSD, USDCAD, AUDUSD, USDJPY, tend to have movements a little more “straight” as it were.
However, we can still see some other big movement with characteristics of “parabolic” type, such as the great bear market of the EURUSD of 2014, in which three parabolic waves could be observed to the downside.
Here, once again, the theory that when the parabolic movement arrives is the best thing to put on the opposite side, whether it is long or short.
As we can see, before the EURUSD bear market ended, we had three more short-term movements with parabolic characteristics.
The rebounds of the first 2, of about 300 pips, believe me that it is not worth it or try to catch them, because the probability of you success is very low.
For example, imagine that we are in the first movement and you think that the movement is already parabolic at 1.28 and you get long in that pair.
What happened is that the price continued to fall until 1.25. Only at that level would it have been worthwhile to get long looking for 200 or 300 pips. However, just as you could guess right there, you could have chosen 1.28, 1.27 or 1.26, cases that are not so good for you.
So we see that it is an operation that often is not worth pursuing.
The case where parabolic movements occur most often in Forex is in exotic pairs, such as: EURTRY, USDTRY, USDMXN, USDZAR, USDBRL, USDRBL, and so on.
In those cases, we do have more parabolic movements in the final phases of the “exotic currencies” bearish movements. However, they are quite complicated trades to carry out given the problems of this type of market.
Parabolic movements in stocks and CFDs
If we operate stock CFDs or simply these assets, we will see large parabolic movements quite often.
As we can see, the slope is becoming more and more inclined in the bullish phases
Cases like the one I explained about Nvidia and many more, such as Apple, or actions like Inditex in Spain, present situations in which we can see great ascents in which the slope is rising in strength.
A case that I remember was the one I mentioned 3 years ago in the DAX 30, when the price seemed to acquire a parabolic phase similar to 1999. Interestingly, that was a good “prediction” because the price fell after about 30 %, indicating that on that occasion the DAX itself was overbought.
This last example can be used to see how sometimes the parabolic increases are quite important in large index markets and that they tend to present good opportunities for downward trading or to simply exit the market if we are rising.
Parabolic movements in raw materials
This is a market in which this type of movement occurs in the great upward phases of raw materials, such as that of the 70s of the 20th Century or that of the first decade of 2000.
In the latter case we have examples such as silver, which gave us a parabolic movement of several waves of rise for almost ten years, in which each “wave” was followed by a fairly strong correction, as in the case of 2008, with a fall of more than 50%.
In this case we see that getting on the defensive at the time of the parabolic phases of the waves would not have been such a bad idea. The really difficult thing is, again, to get a point near the peak. That is very difficult, without a doubt.
These markets we can operate both CFDs and futures, being, by the way, very dangerous, if we decide to enter with a lot of leverage.
Parabolic movements in cryptocurrency
Perhaps the market parabolic star has become the cryptocurrency, bubble where they are, in which the prices of the same, starting with Bitcoin rose dramatically, in most cases with exaggerated parabolic movements, followed finally by large collapses.
This is valid for the bullish phases that have occurred. Not only the 2017, but the previous ones.
The case of parabolic movements in cryptocurrencies is quite evident.
You only need to see the example of Bitcoin in its rise of 2016 and 2017 to see what really exaggerated can be one of these phases when it is in bubble mode.
As we can see in the graphs, the rise of Bitcoin from 2015 to 2017 was so brutal that we had several parabolic ascents within it, among which we must highlight the latter, because of the magnitude of it.
Here, therefore, we see how problematic it is to try to play the short side when we see that a price is reaching a movement of that kind.
Surely we’re going to burn our hands a lot of times.
Here we see the previous parabolic markets, although some do not even see them as small as they were in the long-term scheme, and yet they were movements of more than 100% rise
This great global parabolic price movement of Bitcoin took place in several phases, 5 or even more depends on how we see it.
In each of these phases, the market rose more than 100% in a parabolic manner.
Let’s see another example of how difficult it is to “catch” the correction movements in the parabolic climbs, especially when it comes to the intermediate ones within large parabolic movements of many years.
In the graph 4 of the parabolic movement of Bitcoin we find that the price is at 900 and starts a new ascending phase.
When we reach 1500 the price starts to accelerate and we get nervous.
We see how the price has a rise with a “parabolic slope”.
When the price is already in 2000, after more than 100% promotion, we decided that the parabolic movement has to be finished.
We are short.
However, here we see how the market rose another 50% before correcting even below 1800.
What level of risk would you be willing to assume here?
What level of profits?
What would you do if after falling short in 2000 the market is trading at 3000 and you have lost 50% of your capital, assuming you are not leveraged, of course? Would you endure? But, hold on, for what? So that the price only corrects up to 1,800 later? Bad profit and loss ratio.
Yes, true, you could also have been short on 2,800, but also 2,200, 2,400 or 1,800.
What I want you to see is that it is very complicated to get the right moment that will bring us the best result when trying to play the opposite of a parabolic movement.
If we look at the whole issue from the long term we can clearly see how all the upward movement of Bitcoin is parabolic and within it there are many minor parables, such as the one we have just seen.
In cases like this, it would be best to go betting on the later parables with the hope of finding the final movement, as in 2018, but you will have to spin very thin, believe me.
How to really operate the parabolic movements?
Here we have seen several examples of parabolic movements and how some are different from others, so we cannot find a common pattern that leads us to achieve constant benefits.
What these parabolic movements in the Stock Exchange, CFDs, Futures, Forex or Cryptocurrency do have in common is that all these movements are preceded by initial bull markets.
If you look at all the cases that I have mentioned or in large bull markets that occur to you in history, you will see that these parabolic movements were preceded by smooth and constant upward movements.
What to do then?
The best thing you can do in these cases is not to try to go against the parabolic movement once you start to “see”.
No, it is best to predict these parabolic movements and enter the early phases of it: when the market is in initial trend.
That is why the concept of trend following acquires such great importance; because if we follow it many times, we will end up in the middle of the strong phase of the climb, which is usually the parabolic one.
Now, what we have to do is be very careful to get out of the price before the final parabolic phase occurs. For this, as always we will have to use the stop orders or just leave at all when we think that the market has gone too high, although if we listen to Jesse Livermore the “price is never too high”, and believe me, few things suck more in trading that getting out of a trade to see how the market continues to rise another 100% more.
Not only does it hurt to lose, but not to win.
That said, it never hurts to analyze these parabolic movements and bear in mind that eventually a big collapse will follow one of these, and that it would not be a bad idea to go short or leave the market when the situation is extremely mature, such as in 2017 with Bitcoin.
The parabolic movements are the consequence of the arrival of the general public to each asset. Moments like this usually tell us that it is close to leaving that market, especially after movements of this type that last for a long time, such as the Nasdaq bubble in 1998 to 2000.
Greetings and good trading