You watch your equity position tear away on a 200% parabolic run and then you allow your greed and fantasies to kick in, hoping that it will go up 300% just as it turns down and erases half of your gain. That’s how you make 100% return on what was once a 200% gain. So how do you profitably trade an equity that is in an extreme uptrend and going vertical? The answer is that you trade it “very differently” than your run-of-the-mill trades.
I have a couple of positions presently that remind me of similar equities in 1999-2000 where panic buying had set in and there seemed to be a complete absence of sellers – a situation which created a sort of buying vacuum. Traders were rushing in regardless of price, fearing that they’d be left behind. Most of my readers are sophisticated enough to know not to be buyers with this kind of price action, but the dilemma presents itself when you already own the stock and your equity becomes the object of everyone else’s lust. The challenge is how to maximize your profits without overstaying your welcome. Here’s how I trade these money machines:
- I learned during the tech bubble of 1999 that you could never guess how far and how high these momentum stocks could go. Just hang on and enjoy the ride, but always pay very close attention and be poised to act quickly.
- I go into “dual stage” mode. The first stage is to acknowledge that I have a tiger-by-the-tail and that my equity is going parabolic. I recalibrate my emotional meter to accommodate this new mindset. The second stage is to bring out a different set of selling tools appropriate for this particular circumstance.
- I have written before about my sell flags checklist which is the normal system I use to close out trades. Parabolic stocks, however, require a unique arsenal of tools because the regular indicators are a bit slow in this new hypertime and space.
- In 1999, I had a number of trades where I closed out 50% of my position and the remaining 50% doubled in price again. My point is twofold. Always pyramid out of your position based on market action – not emotions – and don’t be afraid to let your remaining position run if the market turns upward and presents the opportunity.
- A parabolic stock enters hypertime – it’s own accelerated space. You must crank up your heart pacer and join in! If you were content to check prices once a day before, you now need to use email alerts and check regularly throughout the trading day.
- With normal positions, I follow trends and moving averages, as well as areas of support and resistance. With these high flyers, I use Welles Wilders Parabolic SAR which stands for “stop and reverse”. It’s a non-ambiguous signal that demands my attention and requires a decision.
- On minute-to-minute charts, I want to see the big volume trades on up-ticks, not down-ticks. Daily money flow tells me if buyers are still in charge or if the balance of control is shifting to sellers.
- I carefully watch the daily range and where the price closes in relation to the day’s high versus the day’s low. If the daily range begins to expand on down days, I’ll take some money off the table.
- Lastly, I use Bollinger Bands. Much like SAR, if price closes below the lower band, I’ll take some money off the table.
These are not my normal monitoring tools because these are not normal equities. The mere act of deploying tools I don’t normally use constantly reminds me that the mindset I must bring to these parabolic trades must also be totally unique. The bottomline is that you must keep your finger on the trigger, but let the equity speak to you as to its true intentions and then hang on for the ride for as long as she runs.
Trade well; trade with discipline!
-- Gatis Roze