Tuesday, February 11, 2014

Understand Parabolic Growth In Investing

When I talked about parabolic growth, it means a company share price grow exponentially on one direction towards the up trend.

In normal circumstances, there isn't a company or even an asset that will grow exponential non stop. Do not get me wrong, there are many good companies that shows consistent growth but in order to be sustainable the company will need to grow within a reasonable rate.

Let's looks at what parabolic chart looks like in stock market.



The above chart shows a parabolic style where the growth line had bee almost towards up north pointing to 90 degree. If during this time, you are being advices by anyone to invest in this stocks you need to be extra careful and proper risk management process needed to be in place.

Parabolic chart can be very dangerous just as now fast it grow upward, the downtrend will also follow through fairly quickly same as the example above. The company might be financially sound but the growth rate can no longer cope with the actual expansion it needed and soon the price will fall back to the company fair value or even lower due to fear of collapse. There are many cases or examples of companies showing a parabolic chart and soon crash. If you are a short seller and you have seen a good opportunity there in a parabolic chart, you maybe able to short sell and make a profit but bear in mind that no one can predict when uptrend will end because it maybe able to continue for quite sometime before it collapse.

Same goes for property price, gold price or the recently famous bitcoins where the pice soar and drop within a short span of period.

Conclusion: Parabolic chart means a exponential growth in value resulting in a almost 90% upward chart which usually does not sustain for long.

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