Never Chase the Straight Parabolic Move

Every day, traders face temptation.

One of the worst temptations is a straight parabolic move. They’re exciting to watch, but chasing often leads to hard lessons learned the hard way.

I can’t believe this is controversial (but it is): trading isn’t supposed to be exciting.

The best trades are the “boring” ones.

Table of Contents

1 The Big Picture
- 1.1 FOMO and Optimism Bias Go Hand In Hand
- 1.2 My Take
2 Watchlist
3 On My Radar

The Big Picture

Some people like to point to a single winning trade and say “chasing that parabolic move paid off.” It happens. It also creates a problem.

There’s a mental trap that most people (including traders) fall into. It’s called optimism bias.

One example is when you look at the potential for a bad outcome and think to yourself, “That won’t happen to me.”

Applied to trading, it might look like this:

Imagine you saw Reliance Global Group, Inc. (NASDAQ: EZRA) right as it topped in premarket yesterday.

You see a stock that’s up +105% in 30 minutes during premarket trading
You react emotionally and, not wanting to miss out, you buy the stock without creating a trade plan
You know these premarket runners can fail, but you’re optimistic that this one will keep going
The stock drops 24% over the next 20 minutes, forcing you to cut losses or join bagholders anonymous.

FOMO and Optimism Bias Go Hand In Hand

That trade was motivated by a combination of fear of missing out (FOMO) and optimism bias.

And it’s exactly what happens when someone chases that first parabolic move, often in premarket, only to watch as the stock fades into the open.

It’s easy to recognize FOMO. But optimism bias is a little different. That’s because it isn’t necessarily a bad thing unless it leads you to make bad decisions.

Again, there are individual plays where chasing can lead to a big gain. But people remember the one that worked instead of the 99 that didn’t. That’s called selection bias. Think of it like only remembering the good times.

We tend to remember that one time out of 100 where chasing paid off, even when we lost the other 99 times.

The cure is to always create a trade plan before you enter a trade. It will stop you from chasing straight parabolic moves and give you a much better chance at long-term success.

My Take

You can do what you want, okay? I’m not your boss and I’m not your dad. I just think that if you’ve watched these chat pumps enough times, the temptation goes away.

Now, that can be confusing when I call out a stock and say it’s one of my tops for the day. So, remember that trading isn’t binary. It’s not buy or don’t buy. I wish it was that simple. There are shades of gray to this.

But as for me ever buying those straight vertical moves? No chance.

Watchlist

We watched today’s pick every day last week as it squeezed from $3 to over $100 per share.

It’s not unusual for a stock like T3 Defense Inc. (NASDAQ: DFNS) to completely unwind once the squeeze is done. It looked like DFNS was doing just that from after-hours last Thursday (July 30) through Friday (July 31).