The Infamous Parabolic Short - When to Attack, When to Avoid

The parabolic short..your best friend or your worst enemy. For most, the latter. Even though you "have fun" trying to play them you're probably not very profitable doing so. The sooner you realize you are not here to get a rush, and that you're here to make MONEY, the sooner you can successfully extract money from this setup. But if you're a kid in a candy shop who just sees a running stock, waits 3 minutes and tells yourself you were "patient" (vs. your usual 2 minute wait time before taking a stab) and short "because its up a lot"...you're going to have a very rough experience. 

If you're a smallcap trader with a small account, or even a larger one - this setup goes right to the top of your list of things you want to conquer. It's fun, it's exciting, you see established Twitter guys making tons of money trading them, and it's just downright exciting to be involved with the volatility and uncertainty of how it will play out. And that's why we love them.

ESPECIALLY if you're trading with a very small account. Most reading this probably have a few thousand dollar accounts, which is what drew you to smallcaps in the first place. So you've got your $2-3K account, and the first thought in your head is "ohh baby..I'm gonna short this garbage down and bank!" You start doing the math in your head on this $XYZ stock that just went parabolic from $3 towards 5, and dollar signs start falling in front of your eyeballs "If I just short 1k shares of this and catch $1 move back down, thats $1000 bucks! Siiiick! I can double my account just by catching a few of these!"

Does that sound familiar?

If it was that easy, do you think people would be sitting in cubicles all around the world right now at desk jobs they hate, talking to people they don't like, sitting in rush hour traffic daily, and slaving long work weeks for average paying jobs in the real world?

Get the fantasy story out of your head that you're just gonna wake up, short the low float smallcap runner of the day and make money. Go join Tim Sykes or TTL's room if you want someone to tell you trading is easy and you're going to bank, I'm much more of a realist. There's a LOT more effort you need to be putting in than that. Some of which I'll be discussing today.

Everything I go over in this post are suggestions for putting together a framework of approaching the parabolic short play, and a checklist of things that should become second nature before even considering placing a trade on one.

And one final disclaimer: this is NOT a beginners trade! If you're very new to trading, you shouldn't be touching these things. At all.  Just watch them for a while, don't participate. Or paper trade them.

So lets get into it. 



A stock is going parabolic. You're now excited.


Step 1: FREEZE.
The first and only thing you should be doing right off the bat...is freeze. Don't do anything that involves your mouse even remotely near your montage window or placing a trade. FOMO is flooding into your brain. Fight it off, and relax.

Step 2: FLOAT 
Check the float. First thing I do. What is the float of the stock. I use three sources to check the float, as float data sometimes varies. I first check Finviz, then shortsqueeze.com, then yahoo finance. Very often you'll get 3 different numbers, I just do my best to gauge an average using all three of them to get the best idea of what the float of the stock is.

The lower the float, the more potential it has to do something nuts. If the float is under 5M, heads up. You could be in for some serious shenanigans. The parabolic runners are almost always low floats, and theres usually a few big institutions responsible buying them up. The lower the float, the higher the level of manipulative behavior involved typically. So know the float, and the lower it is, the more potential range it has, and the less size you should be using.

The smaller the float = less liquidity = more volatility = use LESS SIZE.  (5-8M or lower)

Typically if I'm shorting a smallcap parabolic runner, I'd use 1000 share starter most times. But if the stock has ran a few bucks and has a 1.5M float or something very small like that..I'd typically cut it in half and start in with just 500 maybe. The size of the float has a direct implication on how you'll be approaching the trade. Anything under 5M, you should be using half or less than your typical starter size, with room to add north into a certain predetermined "area" on the chart, not a specific price level to the penny. Will get into that more in a bit.

Step 3: DAILY CHART
Check the daily chart. There are three very specific things I'm checking for on the daily.
1) Is it a former runner?
2) If yes, how did it react on the days it's ran in the past?
3) What was the action like in the months prior leading up to this current run day?

If it's a former runner, people remember that, and it's more likely to potentially have legs, so it's something to be aware of. If it is a former runner, we move on to number 2, how did it react on the days that it ran? I'm looking for lots of big wick candles on the daily chart. A big wick indicates a stock that ran, and was unable to hold it's gains for the run. We like those. Stocks all have different characteristics, and you need to be aware of them. A good example was SINO which ran a bit last week. As soon as I saw it running, my eyes lit up.  This is one I am very familiar with from the past, but also if you just pull up the daily chart, look at all the areas I have highlighted with the yellow dots & arrows. Anytime this stock makes a run, it leaves a huge wick on the daily. Immediate assumption: This stock is really bad at holding it's gains and tends to give the big morning rips back.









Here is my chart for SINO from a few days ago, August 31st. It was gapping up on nonsense news. And as you can see I got fairly aggressive shorting and was fully prepared to add higher. Here was my comment on it premarket, and now you can understand why I felt that way, after taking one look at the daily chart on all it's run days.  That decision was based off of the daily.




I was prepared to add higher if need be, but it seemed like a good spot to get involved gapping up right into that $2 whole number area, with conviction based off the daily chart wicks.



Part 3 of the daily chart analysis is "What was the action like in the months prior to this run day?"
If the parabolic runner has been in a heavy downtrend prior to the run day, then you can expect heavy selling pressure. Lots of people probably got bagged and are stuck with their long position and looking for any excuse to exit it on the next good pop. Nice example of that would be another recent runner, JAGX. Here's the daily.


See the nice big wicks on the past daily candles recently? So automatically in my head if I see this thing run again, I know it's weak. And if it's really ripping, I can short into it pretty confidently knowing it's probably going to shit the bed.  So it actually just ran almost 40% this past Thursday 9/1, from 1.30s up to 1.80s. Look at the prior action on days leading up to the run. It ran back in June, then just a steady trickle all the way back down to the lows prior to Thursdays run. So you can bet there's quiet a few bagholders here trapped from the previous runs, and thrilled to escape on the next bounce. Which is exactly what happened. JAGX gapped up and ran a little, and there were tons just waiting to hit the exit doors, and it slammed right back down to the lows by close. So look for those type of "weak" setups...on names that have a lot of daily wicks, and a lot of prior weakness heading into the run day, where bagholders may be trapped and looking to sell into the run. These are the highest probability parabolic short plays.

Lets observe the opposite scenario now. Our good friend REN. Here's the daily.


REN started to run on July 11th. So lets employ all the daily logic we just learned on this name.

It's parabolic run begins July 11th. We look back on the daily. First of all, there's not many wicks on prior run days to give us any indication this name is going to run and give it all back in the same day, so thats one reason to be cautious. Secondly, look at the action leading up to this epic run. It's not like it's been trickling lower  or beaten into the ground and trapping longs and bagholders, right? It's been trading sideways for quite some time. So if it starts to go, there's probably not a ton of selling pressure that will be coming in from bagholders who have been stuck long and can't wait to exit the position on the next pop. Another reason to be cautious, and a big reason why REN has been able to sustain this current run it's on, because there is not much selling pressure from previous trapped longs. Thats important. REN is running for a few other reasons as well, but thats a big one.

So I can't get into too much detail on this stuff obviously my fingers will fall off from typing a mini-novel, I could talk forever about it. But thats some "101" on it - BE AWARE of the daily chart and a stocks past characteristics and current standing to help you better guess how the days price action might play out, and whether or not you're dealing with a "weak" runner or a potential multi-day runner that you want to avoid shorting on Day 1. 

"Look to the left to help you see the right." Is a favorite quote of mine relating to that.

Step 4: Short % Float 
Know what percentage of the stock's float is short. You can get a good idea of how crowded the play might be based off that. Anything over 15%ish is high, 25%+ is very high. For that I use the same 3 sources, and the info is found in the same location on Finviz, shortsqueeze.com and yahoo finance. You'll get 3 different numbers again, use your best judgement to get an idea. If the stock has a high short % float and going on a parabolic run, you may want to shift your bias to buying dips & washouts and going for the ride versus trying to short it down, because thats what everyone is trying to do. I've used this strategy on REN during a good portion of this recent run. Everyone is ripping their hair out trying to short and catch the top, when its been an extremely obvious and easy long trade for weeks now. (Float rotation - topic for another day.) If you can't beat em, join em.

Higher short % float = more you should be open minded to a long instead

Higher short % float = less likely you want to be a part of the crowd & short with them. If you're one of those people who just can't long a stock, then maybe it's best you just avoid that trade altogether if it's got a high short % float.

Step 5: Be aware of other market leaders and runners in Smallcap Land at the time you are looking to take the trade

Know your surroundings. If you wake up and open your platform and there's only 1 single smallcap name gapping up and running, thats a red flag if you're looking to short. Chances are if you're super focused on nailing one name short out of the gate, guess what? You're not alone. If there's only one obvious runner, you and many many others are staring at it and all want to short it - it's much more likely to get crowded quickly and become a headache.

The absolute BEST time to short a parabolic runner is when there are multiple parabolic runners going at once. It's more attention spread out, more money flowing into one and out of another. Day traders have ADHD like you wouldn't believe. They can be shorting one thing at one moment, and then let something else start running and watch how fast they run towards the new shiny object and forget about the old one.

This is why "sympathy" plays are often great shorts, because they're in response to something else that has already been running, they're a "secondary" runner, and likely will not be attracting as many eyeballs, therefore, more likely to fade and not be as crowded.


So to quickly recap the things to do once you see a parabolic runner:

1) Freeze
2) Check the float
3) Check the daily
4) Check the short % float
5) Analyze the surrounding circumstances of the runner, sequentially in time
6) Once you've done all this, then think about attacking

I know it sounds like a lot, but with some practice, you can do all of that within a minute or two. It becomes second nature.

Also, a runner rarely goes straight up and straight down, theres very often a second push. Look for that, in conjunction with buyer exhaustion(volume).

Volume plays an entirely separate part in this discussion about when to attack, something I can't get into today, this post is long enough lol. Shoot me an e-mail at dvg3289@gmail.com if you're interested in learning about the volume part of the equation and more specifics on the "when to attack" idea, I'm discussing it daily in real time in my room with my guys.


About when to attack...some quick comments on expectations:

Firstly, when dealing with parabolic low float trades, use resistance "areas", not specific numbers so much. You can't get super cute and try to be exact when playing the frontside of a parabolic runner. If something seems to have resistance around 2.75, you can expect it to head to 3. If it's got 3.35 resistance...you can expect it to blow through that and head towards 3.50ish or higher. Always use the nearest whole or half dollar mark above where you think the top should be. And be fully prepared to add higher into that area.

"How do I pick a risk level"? Probably the next logical question. And my answer is, you don't. There's not a "level" I'm ever risking off of when dealing with a parabolic short. I'm risking off a DOLLAR number, not a price level on the chart. I personally have an "oh shit" handle that governs my actions. A max loss number I'm willing to take on any single trade. Say mine is $5000. Thats the maximum I'm ever willing to lose on a single trade. So if I'm shorting the front side of a para move, I've made a plan based on everything we discussed above, and now I'm entering the trade risking off of my "oh shit" handle - I'll add to the trade and manage it based off of making sure it stays below my oh shit handle dollar risk number. Thats how I gauge my risk on them. Not so much "oh if this thing breaks above $3.00 I'm bailing" - no. Thats how everyone does it, and thats why so often stocks break right through key whole numbers/resistance areas and then fail shortly after. They trigger stops from a large majority of the people playing them incorrectly, and then after that they fail, having the "crowd" screaming "oh you've got to be kidding me did I really just bail at the top?!" How often has that happened to you? Don't be a part of the crowd.

Here is the reason I say it's not a beginner trade. First, you've got to be able to do all that analysis we just went over, and do it quickly and correctly. Second, you've got to be fully prepared to add to a loser if you're dealing with a market open parabolic trade. If you're not comfortable with that, then don't even start in. Third, if it goes wrong, you've got to be prepared to take a larger loss than normal. Everybody sees the parabolic short as a big potential winner. Guess whats on the other side of that? A big potential loser. So if you're looking for a "low risk" trade thats going to offer you huge profits, you're looking for a unicorn.


The entire premise of this "game" is to be there to short the parabolic runner when the least amount of people are there to do it with you. If you show up too early, you're there with all the other impatient people, and you'll get wrecked. If you show up too late, you're with all the stragglers and lazy people who chase a name down because they were too scared to get in when it was ripping, and those scared people are also the first ones to panic cover out as soon as the thing pops a few cents, causing others to follow suit creating more headaches. So you don't want to be with that crowd either.

It's a fickle game to say the least, one MUCH more complicated than "Oh I'm gonna short the parabolic runner of the day and bank" - not the way it works unfortunately.

So do your homework, practice doing these things in real time once you find a runner, and place some mental paper trades based off your findings, and see how you do. It gets easier as time goes by.


Good luck, hope this helps, and enjoy the rest of your Labor Day Weekend!

Dante


Comments

  1. Great stuff, looking forward to hearing about the volume signals you look for!

    ReplyDelete
  2. really GREAT JOB.. thank you so much for you WORK!!! helped

    ReplyDelete
  3. Super helpful and very much appreciated.

    ReplyDelete
  4. this was my story story today on $CLRB low float less than 5m tried to buy the dip and boom..great points ! thanks!

    ReplyDelete
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