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Thursday, 14 March 2019

TRADE OF THE WEEK #6 : NAIM HOLDINGS BHD



The profits from this week's trade is small compared to other TradeOfTheWeek installments we have published. However, as a moneymaking opportunity, this was arguably the best one. As a tactic, it's one of the finest we have in our list. The profit opportunities are large, and the downside is minimal, although it requires a bit guts to buy when everyone else is selling - not just the other way around.

While this is an overnight trade, our exposure in NAIM lasted about 10 minutes. We bought at the close on 13 March and sold almost immediately upon market open on 14 March. Given the trading activity on the day we bought the shares, our chances of making profits were almost assured.

In other words, this is as 'easy money' as it gets in trading. But there is a catch : you have to buy at the absolute price peak, and quite literally in this case.

NAIM staged a huge rally, obviously to the run up in PERDANA shares (a subsidiary) on the same day. While PERDANA immediately gained close to 50% on 13 March in a huge rally, NAIM only caught up later. As at 4:45PM (pre closing time), from 90 sen the day before, the stock was last traded at limit up levels of RM1.20, the absolute highest price it can reach on this day.

Our trading tactic is simple : we bought into the limit up. We managed to rustle up a small amount of 15,000 shares at RM1.20 as buying demand overwhelmed selling at the close period - a good sign that prices will open even higher the following day.

Your obvious questions : Do you need brains to do this? Why is this even a tactic? Even blind uncles know to buy into NAIM nowadays??

Our reply is this : even for obvious trades you will need to have grounded justifications. The trade has to make sense, otherwise it is just a plain old speculative bet.

With this trade, we are laying down the parameters that justify why the trade is low-risk with a higher-than-normal chance of profitability. We aren't gamblers; we have to be able to explain our actions.

TICK THE FOLLOWING BOXES

If you're a sensible human being, you shouldn't just buy into any limit up situations. In situations such as this one, there is always a likelihood of prices collapsing immediately. When a stock hits limit up, why shouldn't it give up its gains the following day?

In the case of NAIM, the positive signs were more apparent than usual. We break it down into seven main points; there are others, but we can't just share the whole ingredients to the special sauce. *wink*

1) Good broader market (KLCI and stocks on Bursa Malaysia)

2) Good sector sentiment (news flow on O&G sector from abroad and locally)

3) Proven sector rally (other O&G stocks already rallying)

4) Explicit link with peers (DAYANG & PERDANA, both linked to NAIM in terms of shareholding, both have rallied strongly)

5) A prior rally to justify this rally (NAIM already rose strongly following its 26 February earnings results, indicating good buying interest)

6) Good price/volume characteristics (liquidity profile - the stock is not encumbered by high volume sellers)

7) Good technicals (easily broke past the RM1 mark after a long consolidation period)

 NAIM, year-to-date daily chart. The long candle is the limit up point on 13 March 2019.


You can use this list in your own trading activity. Our golden rule : Anything less than 5 out of 7 in this list and we would not put on the trade.

By compartmentalising and creating rigid filters, you can save yourself from making bad trades. Never forget that this is a high-risk trade: anything could have happened to destroy the rally, such as sudden bad news, or an unexplained selldown.

Next thing to compartmentalise is the trading execution itself. This brings us to another set of parameters. (Editor's Note : sounds boring? congratulations for reading this far)


THE TRADE

The strong closing of PERDANA and NAIM compelled us to put on a small trade. At 4:50PM we acquired some shares at the limit up level, as the stock meets all the criteria in the above list.

We were anticipating good returns.


Last order didn't go thru.

Now, the compartmentalising: to be clear, we were not interested in riding the position, even though there's a good chance the rally will continue.
With this trade, all we're attempting to do is to lock up the spread: the gap between the closing on 13 March and the possible opening on 14 March. This was the 'easy money' part.

As soon as the market opened, we sold the position at RM1.25. 


So what happened next? We missed out on the rally from RM1.25 to RM1.40, but it doesn't matter to us. We had a simple plan and we stuck to it. 

The position could have been bigger too. Or we could have held on longer as the position becomes profitable. But these weren't part of our trade this time. It pays to be conservative: there's always a risk that prices will fall back to RM1, or that broader markets will suddenly sell off, or that the oil and gas sector rally will come to a halt (we're already cautious of this - it will happen eventually).

So for context : we made RM750 for about 10 minutes' low risk work with a 4.15% yield (4:55-5:00PM on 13 March, and 9:00-9:05AM on 14 March). Anything beyond this requires a different tactical approach, and the risk profile will rise considerably.

You get some, you lose some.

Outcome 

Gross profit : RM750
Return on Investment (ROI) : 4.15%
Duration : Overnight, total of 10 minutes









Sunday, 3 March 2019

TRADE OF THE WEEK #5 : V.S. INDUSTRY BHD


As we have demonstrated before in our past TradeOfTheWeek posts, a lot of the short term trading activity does not require substantive fundamental analysis. However, it is essential to know the basic facts about a company, the current investor and business sentiment towards the sector it operates in, its historical stock price, and its historical earnings performance.

For growth stage companies, their expected earnings growth means that the stock commands a market premium. But this trend reverses itself once it becomes clear that the previous expectations are far too rich.

Essentially, this is what happened to VS Industry Bhd, previously a high flier growth stock due to its leading status as a products assembler and manufacturer. Having a flashy client such as Dyson also helped.

But the growth angle hit a speed bump recently. The company warned that it expects slower client orders in the coming quarters. Since then, the stock has steeply declined but has shown volatile price activity - an invitation to traders like ourselves.

Note that we said you don't require 'substantive' fundamental analysis when analysing a potential stock to trade. But you do have to be familiar with the company's well-being from a business standpoint.

To overly simplify things, from a fundamental standpoint we always pay attention to the following in any company. Of course, these figures are readily available on the Bursa Malaysia website, for those who aren't too lazy to look for them:

1) Company's net asset value per share (a measure of intrinsic value relative to where the stock is trading now)
2) Its debt situation (is it normal for the sector?)
3) Its cash flow (constrained? Improving?)
4) Its available cash and reserves (a measure of prudency)

Fundamentally, VS is something we will continue to recommend (we have traded it many times) as it ticks all the right boxes.

THE TRADE

'The Spike'. Daily chart for VS back in January 2019. 

10 January price/volume data.

Let's contextualise this kind of movement. A price increase from 75 sen to RM1.03 in one day is highly unusual. But you don't need to know the reason behind such a move to trade the stock. We didn't and couldn't have figured it out, even if we had tried. 

Interestingly, the best trading opportunities tend to come when the rally cannot be explained. We have found that even market rumours tend to dilute the longevity of a stock price increase. And we do not trade when the news is out; neither should you.

Long story short, we managed to capture profits after identifying the stock's behaviour on 10 January as exceptional. For some reason, it is moving up, and far too fast for its own good. The strong volume was also a prominent sign that the buying interest is immense. Someone was buying - it could be fund managers, or bored uncles with retirement savings to burn. 

But more importantly, the price activity was aligned with our fundamental analysis of the company. It is a viable long term stock, and there is actual justification for it moving upwards.
Crappy companies tend to see their battered stock languish for years to come. But good companies tend to see their battered stock recover in fits and starts.

On this day, the movement was such that we knew there was a limited time frame for entering and exiting. The outcome:




Seven minutes ain't bad. The principles of short term trading are explained in painstaking detail on this blog; you don't have to look far to find them.

In a short period, we fortunately were able to contextualise the short term characteristics of VS. Think of the 'rubber band principle' : the longer the stretch, the faster it will contract. In other words, if a stock can move up by six sen (6.5%) in seven minutes, there's a good chance it can go down just as fast.

We got into the stock only because we identified the temporary market mania (at least seven minutes' worth); the large volumes, the quick breakout beyond 90 sen (a key resistance point), and the velocity of the price move, are all good indicators. When any of these start to recede, you will see a price pullback.

In fact, the price went beyond our exit point to RM1.03. But then it fell back hard.



And thus the trade window has closed for the day. Opportunities are finite in their potential and time frame; they are available in the market, but you always have to identify them.

TWO MONTHS LATER...

Contextualise a stock in a long term context and you will find different types of opportunities. If you're a smart buy-and-hold investor (we are not smart, and we are not long term oriented), you would have been able to capture VS stock at the 75-90 sen level. Value investing is such a crowded market that you will always find backers of truly valuable companies; they may arrive late, but there is no resisting a viable long term stock.

Just over two months later, as of 1 March VS has successfully broken past the RM1.03 mark. Enthusiasm has returned, and the smart long term investor would have realised a 30% gain in just under two months.

Slow but steady rise since 'The Spike'.

The lesson : find a strategy that works best for you and stick with it. 


Outcome

Gross profit : RM2,400
Return on Investment (ROI) : 6.5%
Duration : Intraday, 7 minutes










Thursday, 7 February 2019

THE PELHAM BLUE FUND : 2018 PERFORMANCE REVIEW






Note : This post is a performance review of the Pelham Blue Fund last year. We briefly discuss past performance, thematics, as well as the 2019 outlook. To summarise, we had an inconsistent year in 2018 with major gains in the first half, followed by weak performance in the second.
 

Total Gains in 4Q18, in percentage terms : 2.83%

2018 Total Gains, in percentage terms : 44.3% 

Against our performance benchmarks:

1) Amanah Saham Bumiputera 1 : 7% (2018 dividends)

2) FBM KLCI : -5.16%



4Q18 : Return to Stability, Low Excitement

This period was marked by policy risks as the Government began introducing and implementing new initiatives, some of which severely affected certain sectors such as gaming and telcos. As you may know, the end of October also marked a period of accelerated decline in the global markets, with US and Hong Kong indices falling as much as 10% within two months (for context, these kinds of declines have not been seen in such a short time period since the global financial crisis).

Similarly, oil prices staged a similar fall due to oversupply concerns. The commodity hit a four-year peak in October 2018 before losing almost 20% in value by the end of the year. These factors and more have shaken the market's stability and investors' confidence, driving down stock prices.

In Malaysia, the selling activity during 4Q18 spans sectors and business lines. GENTING, TM, YTL, AIRASIA were among the big caps that took a big hit. We also saw price shocks in the mid cap and small cap spaces, with PRESBHD falling by as much as 50% (due to a margin call and forced selling by its major shareholder). Previously favoured stocks such as DSONIC, VS, and most construction companies also fell steeply for various reasons.

The good thing from all the events described? They actually contributed to a more volatile market, allowing for certain opportunitistic trades to be done and replicated. We have captured short term trading opportunities in some of the stocks above to capitalise on the artificial mispricing - a core mandate for this Fund - as well as short term volatility present in the indices.

Hang Seng put warrants continue to be a decent source of active trading income, as Hong Kong reacts strongly to the shocks in US and China. For put warrants, we would only consider a trade when the price shocks is at its greatest. That means we don't trade day in day out; it is much too dangerous.

On the other hand, having learned some important lessons during a very challenging 3Q18, we made the decision to reduce active trading activity significantly to minimise losses. In addition, unfortunately there was a drought of opportunities in 4Q18 to make consistent, market beating profits.

A broadly negative market means that a market bottom is never assured. We are also wary for the souring prospects for the Malaysian economy. Analyst estimates put GDP growth at 4.7% last year, yet from our own admittedly basic research, overall corporate earnings have been broadly negative over the same period!

This is not something that we feel is realistic, or sustainable. There will be a point where either the economic data makes sense, or the markets will readjust its expectations further. Basically we expect GDP growth to slow, reflecting the already slowing corporate earnings trajectory.

At this moment, in early February 2019, there seems to be a positive lull in the global markets. After a miserable last two months of the year, global markets have rebounded at least 10-15% from their recent lows. This positivity is contagious: indeed, Malaysia has seen an increase in investor inflows in January. Whether that translates to a long term holding position, or a short term bargain hunting trade, we do not know yet.

The Fund's 2.83% return in 4Q18 is reflective of greater prudence and a reduction in trading activity. We do not want to risk a 10% quarterly loss. Relative to the market, the quarterly return is considered encouraging, though we acknowledge that more can be done, and in a better way.

As part of the longer term vision for this Fund, we are actively seeking more stable and consistent returns to reflect better risk management. We have shown in 1Q18 and 2Q18 that it is possible to record strong double digit gains, but these kinds of opportunities are seasonal and not meant to last. This is an opportunistic Fund; we are committed to ensuring a better deployment of capital this year, even at the cost of lower overall returns. Our plans for 2019 is described later in this message.

2018 Review

It was a year of mind boggling highs and disappointing lows. To sum it up, our investment style worked particularly well during the first half of 2018. It fared a lot worse in 3Q18 and 4Q18, indicating that our style is a seasonal one. We are cognisant of this serious issue, and are making active changes to improve.

If you're a regular reader of our investment blog, you may have got a better idea of our typical investment approach. While we do have a mandate and a proven competitive advantage, our 'hit rate', or trading consistency, was admittedly spotty in 2018. There were simply too many opportunities missed, and major losses that held back our overall performance. Our task this year is to iron out those deficiencies and ensure that we can make optimal returns, relative to market conditions.

To avoid being a 'six-month wonder', we have significantly reduced our trading activity. With our extensive research, we have established very strict parameters for identifying and trading a stock or warrant. Being selective is our main challenge for the year. A scattershot approach works wonders in a bull market, but in a very challenging one, a degree of wariness and conservatism is important.

We have different approaches that work well to a certain degree. Some are based on market conditions, or the current investor sentiment. We are continuously working towards cutting down approaches that don't work too well, and those that are inefficient.

Our focus is on identifying the very best opportunities only. We will not trade until we find them, even if it takes weeks or months. Less is best.

2019 Vision and Approach

We largely agree with the general view that the market is heading downwards. We believe that an economic slowdown in Malaysia is inevitable, as well as a (further) slowdown in corporate earnings. Some past market champions have already stopped paying dividends; don't be surprised if more join the fray.

While this may be considered a bearish view, as an opportunistic Fund our job is to react to whatever market conditions presented to us. Our mandate is to beat the market and deliver returns in good times or bad. This has not and will never change.

In light of this, let us reiterate : we are going into cautious mode for the first half of 2019, at least. This means that the Fund will be extremely selective in its trades. We will only consider opportunities where we have a definite competitive advantage.

Our 'edge' lies in two things : short term artificial mispricing (driven by negative news, for example), and special situations based trades (momentum breakout, IPO listings, et cetera). There will be no massive speculative accumulation of warrants. There will not be any buying of cheap stocks if there are no catalysts to accompany them.

Furthermore, we are slowing things down in order to ensure stability and sustained returns. In 2019, the Fund aims for modest monthly returns of between the 4-5% range. Once this is achieved, we will cease all trading activities until the next month begins. In fund management parlance, this is known as 'going flat' - we value being in cash and the leverage it provides to capture only the best opportunities.

There is no guarantee that each month will show profits. On the other hand, we prefer to show smaller, sustained returns compared to the 2018 performance where overall performance was distinctly divided into two halves of the year.

This Fund is a trading fund. Its specialty is in capturing short term trading activities; nothing more and nothing less. Unlike most funds, our active exposure in the market is meant to be minimal. Once we hit our targets, we dispose of the position and return to 100% cash. Think of this as ammunition in order to capture the next big opportunity.

There may be minimal trading, but we will constantly observe the market for trading opportunities. As always, we have a watchlist of stocks that we observe over the longer term, simply to analyse and understand the stock/warrant's behaviour. Many companies with positive fundamental prospects are currently langushing in the market right now; we are waiting for the right opportunity to strike.

Best Regards,

The Team
Pelham Blue Asset Management


Saturday, 12 January 2019

TRADE OFTHE WEEK #4 : DAMANSARA REALTY BHD


Five seconds of observation, plus 10 seconds to decide : do we want to go into this trade? We did, and the reward was some fat profits.

This case is an example of using pure intuition, an important skill for any aspiring trader. It's a skill that has to be honed and fine-tuned. Not only would you be operating with imperfect information, you may also end up making hugely consequential decisions with no supporting information.

That consequential decision is to trade, and committing significant amounts of money into it. This is not a random throw of the dice; acquiring this skill comes from mundane observation work, incessant note taking, and of course, our personal favorite - trades that have lost money in the past.

So how to develop intuition? Simply put, our view is that you have to be able to draw historical parallels. You have to notice the following in the stock, for starters:

1) price and volume activity
2) velocity (how fast it moves)
3) volatility (the rate of fluctuation in the price)
4) the broader market conditions (especially important for momentum-type trades)

Got that? Now do it about 100 times, in 100 different trades. It will likely take you years. We didn't say it was easy, but it can be done.

While many may think we can coast and live large for the rest of our lives trading, the reality is totally different. We still have our respective day jobs, and there are as many tough days as good ones. But every loss endured, and every profit gained, must be seen as a learning process.

There are no two ways about it. Lose money, take notes, repeat, and get better at it. And you will start getting gains.

And when you become good enough, you start thinking intuitively. You see similar situations where a stock can deliver massive profits from a large move - because you've seen it in the past and learnt from it - so you decided to go in.

In a nutshell, this is the explanation behind our successful trade in Damansara Realty (DBHD). We didn't need to do fundamental analysis (there was no time). A cursory Google search revealed no new bit of news; not that we expected any. The stock simply popped up on our screen in the 'top gainers' section (huge price movement on low trading volume) and we intuitively decided to go in.

As you probably know, many stocks that go up massively on low liquidity can fall back  to Earth hard. We assure you, with enough learning and intuition, you can tell apart the good opportunities from the bad ones. But you have to recognise the signs quickly, because in this case, time was literally money (to be won or lost).


THE TRADE

A five-minute chart in DBHD on 4 January 2018. As you can see, we sold near the peak for that day.

The key movement here is the move from 24 sen to 30 sen on very low volume. Our initial thinking was to risk a small amount at the 30-32 sen range and see if the stock continues to rise. If it stops, we would be exiting with a small acceptable loss.

Again, when it comes to thinking about loss limits, remember the golden rule; you must be willing to accept a 5% loss for the opportunity to make 10% in profits. (Editor's Note: you can change the numbers, but stick to a risk-to-reward ratio of 2:1 or more).

By doing this, you'll have a clear idea of what's at stake. It will prevent you from being lazy, or not properly observing your loss limits.

So we bought into the stock at 32 sen at first. We know there will be fluctuations, and perhaps some real selling pressure at 30 sen. The 'breakout' was not assured yet.

The key for us to go all in was the price activity between 9:10 and 9:15, represented in the 't' you see here.




The five minute chart, zoomed in. 9:00-9:20AM

We hope you have a basic understanding of these charts. the 't' basically means that the stock ended the five minute period where it started - at 31.5 sen. The bottom end represents a low of 30 sen and the upper part represents a high of 32 sen.
During this five-minute period, there was substantial buying activity in the stock. This recognition, for us, mostly came from our intuition. Remember that this all happened in five minutes.

Then in the next five minute phase, the stock comfortably broke a new high for the day. We thought it can realistically hover in the mid-30s range or further. Having received the confirmation of our thinking in the movement of the stock, we went in and bought more shares.

And it went up as we expected. We have seen this before. Our intuition guided us in this whole trade.

And less than 30 minutes later, by 9:38AM, we exited. The monetary reward of developing this intuition? In this case, it's a 16% gain in 27 minutes. Gains of RM6,000 plus. (Editor's Note : we try not to compute such gains on a per-minute basis as the figures can be truly crazy sometimes, but we do hope to demonstrate the very real and tangible rewards of being a trader who can recognise opportunities like this one). 

Those first fifteen seconds truly mattered in the end.





OUTCOME
Gross profit : RM6,295
Average Return on Investment (ROI) : 16%
Duration :Intraday (27 minutes), first hour of trading








Monday, 7 January 2019

YEAR IN REVIEW : IMPORTANT TRADING LESSONS LEARNT IN 2018

2018 was both a great and humbling year for us. It marked the first year that the Fund is fully operational, and consequently the documenting of its performance via this very blog. It is a result from four solid years of planning, painstaking research, unsuccessful experimentation, and various other failures.
 

 Keep the pain inside. Source.

Through this blog, we have also encountered (actual) people who (actually) enjoy reading about our journey. We have received a lot of encouragement over this project, even from random strangers on the Internet. We are grateful for the support and look forward to publishing more meaningful content for our readers this year.

Our modus operandi is simple : if we run the Fund well, and conduct excellent trades, we will have something good to write about. We are real believers in giving away information and lessons for free. We do hope that our writing helps you in some way in your own investment journey, whether as a value investor or a contra trader. Whatever you want to be, take charge of your finances. Be bold and take risks, because YOLO.

Obviously last year was a challenging one for the markets. There was a lot of volatility and as a result, investment performance was undoubtedly impacted; it doesn't matter if you're a hotshot multibillion dollar protfolio fund manager or small fry like us.

Our own returns, while good, have been very lumpy. This was a consequence of experimenting with different tactical approaches. We explored many, many strategies with mixed results. But only by doing this - and by incurring the occasional five-figure losses - can we fine-tune our philosophy.

To be a proper fund manager that can consistently outperform the broader market, we needed a competitive advantage. We had to find what we're best at and filter out our worst impulses; indeed, we do partake in emotion-driven trading and suffer from indiscipline when it comes to setting our thresholds.

We are not rockstars; this has been a slow and steady and sometimes painful process. But we are passionate about trading, which has been a major part of our lives.

We don't mind waking up in the middle of the night to check gold prices. Ask us about the history of Bursa Malaysia and we will bore you for hours with dull facts. We have no choice but to become morning people as our biological clock is attuned to market hours.

To us, figuring out the markets is the most interesting puzzle in the world.

What we aim to look like by the end of 2019. Source.



MAJOR LESSONS LEARNT LAST YEAR - IN NO PARTICULAR ORDER

 
1) We are Traders, and That's OK 

We have used the words 'trading' and 'investing' interchangeably in the past. This is because we do not care for the distinction; both practices are intended to chase profits. One is supposedly long term and the other short, but in essence they are both wagers on a positive future outcome.

Of course, value investing (and the dividend yield approach) is seen as more respectable compared to trading. Rightly or wrongly, traders are viewed as scalpers, vultures, short termists, and other undesirable terms.

But tell you what: George Soros was a short term trader (among other things). Warren Buffett is a long term value investor. They both became billionaires in their own approaches. Our point is: there is really no right or wrong. We value diversity of thought, not absolutism.

Without short term traders, there would be no liquidity in the market. And without liquidity, stock markets would be even more volatile than they already are. Even major funds like the EPF engage in opportunistic short term trading. We are all out there to try and deliver the best results, no matter the approach.

When we started the Fund, we admittedly were somewhat confused about this distinction. We have aspirations of being a long term value investor, but that's not really part of our skillset. Like everyone else, we do enjoy the benefits of short term trading and large gains, but we did not see ourselves primarily as traders.

Now it is very clear : we are traders, because that's what we are best at. This means that the Fund's mandate should only be to capture short term opportunities. Our track record speaks for itself. 

So choose an approach that works for you. It's your money; be responsible for it.


2) Being 100% in Cash is Almost Always the Right Move (In a Volatile Market)

The wealth funds that manage billions of ringgit of your money are big fish in a small pond. It's a double edged sword; the EPFs and PNBs of this world own enough shares to support the entire stock market, but this essentially means that their overall performance is directly correlated with the FBM KLCI. The market goes down, they go down (Editor's Note : we mean their ability to deliver fat dividends).

Just like us, sometimes they end up making stupid decisions. But they have to stay invested, because of their mandate, and because their stakes are so big they have no choice. In worst case scenarios, you'll encounter something like Tabung Haji's ridiculous markdowns on their disastrous stock investments.

Objectively speaking, we think this is a senseless portfolio.

As an individual retail investor, your advantage lies in your nimbleness. You can actually get out of the market and remain in cash. Are you a dividend chasing investor? You can still get out and wait to buy your favorite shares at a discount (Editor's Note : to us, averaging down is simply throwing good money after bad, and it's totally unknown if your future dividend yields can actually offset this reckless behaviour).

Our mindset is that of someone preparing for a market crash scenario; the volatility we have seen in the markets so far tends to be a precursor to much darker things to come. During a crash, your favorite dividend-rich stocks will not save your portfolio; their long term value may be assured, but you may be underwater longer than you can hold your breath.

If you're young (20s to mid-30s), you probably haven't lived through a real bear market as an investor. If you're older, and have lived through a real economics slowdown driven bear market (97-98), you're either totally scared or have become wise enough to know when to take your profits.

We always pick safety over complacency. And being in cash has saved us many times in recent months from the worst of the market turmoil. Ready cash is a potent weapon; keep some to buy into the market when everybody else is panicking.


3) The Simpler the Strategy & Mandate, the Higher Probability of Profits

Just like you, we think we know everything there is to know about buying stocks. We have made tons of money by using Strategies A, B, and C. Therefore we are experts in all three, and immediate success awaits.

We used to think this way, and we were completely wrong. There is a better way which can deliver even better returns.

Let's say you're especially good at three strategies. For example, let's say:

A = technical trading
B = trading volatile stocks during earnings season
C = trading KLCI component stocks (big caps).

The best way to optimise your performance and trading profits is not to keep pursuing all three strategies. You actually need to find the one strategy you're best at, and keep at it. Even if it means losing out on potential profits from the other strategy.

Still doesn't make sense? Then compare it to a surgeon with a specialisation, or a lawyer who only practices in one segment of his field. Our point : in trading, don't be a jack of all trades and don't be too smart for your own good, because eventually the losses will catch up with you.

We value clarity of thought above other things. By concentrating on one thing, we're able to steadily hone our competitive advantage, or that all-important 'edge'. Our mind is not muddled by three different approaches at the same time. If you have three things you think you're good at but you can't figure out which one it is you're best at, then you might be in a bit of trouble there.

We're not saying it's bad to be good at different things. But for trading, concentrate on one thing at a time. Learn to compartmentalise and prioritise your work.

What we have learnt was that the easier it is to explain our competitive advantage - to other people, and especially to ourselves - the easier it is for us to find the best trading opportunities.

Make it worth the pain. Source.


4) Psychology & Intuition Matters

Speaking of competitive advantages, one of ours is that we're adept at analysing 'fearful' market phases.

There have been countless times where we have gone into a stock or warrant and made good profits because of the temporary, artificial mispricing. Understanding this segment of market psychology is the foundation for our trading activity. Without it, we would be toast.

But at the same time, we have developed a better understanding of trading intuition. To us, it's not about choosing between being a 'gut trader' (purely intuition) and a 'systematic trader' (purely systems or signals-based).

Obviously doing our homework on the stock is just as vital. But intuition helps us make that trading decision just a little bit faster, and in certain situations, this can make all the difference.

We firmly believe that intuition can be developed from repeat experience. You've seen the same situations before; you may not recall exactly what but as a collective whole, you understand that this trade has important similarities to a previously profitable trade.


5) Detach Feelings or Emotion from Trades Quickly

A lot of people, when they're just starting out, tend to take trading losses very personally. It can lead to indecision, regret, and feelings of stupidity. It's basically the failure to detach the self from the trade.

Our advice: if you really want to be a trader, never take losses personally and emotionally. Some people take a day to get over it, some can move on after 10 minutes of crying your eyes out, and some can move on after not trading for an entire week. Do what works for you; even more importantly, don't rush back into trading until you're regained that clarity of thought.

This is important because every trade must be analysed critically and unemotionally. We don't rush out to get new spouses right after a divorce (Editor's Note: those who do probably have no place in the trading biz).

So for your own sake, do learn how to overcome painful trading losses. They will inevitably happen, but don't let them kill you. Let them make you stronger.


6) The Key to Active Trading Is... to NOT Trade So Often

We get it. Trading sounds like fun, rewarding work. That's probably why you've read this far into the post. Easy money? Sure; we understand that short term trading elicits the same feelings you'd get after a big win at the casino.

Sorry to burst your bubble, but to stay alive, you must NOT be trading most of the time. Trade smart, not trade often. Even if we're doing this trading business full time, we accept the likelihood that there may not be any trading at all to be done for days, or even weeks. That means zero cash flow, and a stint driving fro Grab to make ends meet for your spouse and children.

A freelancer, needing to fine tune this business model. Source.

The real lesson is to only trade when the opportunity arises. And the next one will dispel any notion of 'fun' you may have towards trading: it takes considerable mental strength to do absolutely nothing most of the time. But there is no better filter against losses.

A simple analogy: Military strategists have now discredited carpet bombing (indiscriminate trading) as an effective method of defeating the enemy. They cause a lot of collateral damage (your small losses adding up, plus your brokerage fees), and do not meaningfully contribute to the end outcome of winning the war (making substantial, sustainable profits in the long term).

Instead, we favour precision drone strikes (Trading only when the situation allows it). The military now only attacks specific strategic targets to erode the enemy's capabilities (trade smarter, not more often). And this is done very rarely, and is backed by thorough planning and analysis (duh). The intention is to minimise collateral damage (decrease overall losses) while optimising the intended end outcome.

You win the war by conserving your resources and deploying them effectively, not via brute force. This is trading smart in a nutshell.


7) The Biggest Losses Come From a Series of Crucial Mistakes

The really big losses - and we've had several - come from a series of lapses. They tend to be a succession of serious misjudgments that snowball into into a major one.

A simple example is what tends to happen when you don't stick to your loss thresholds. Maybe you planned to exit that stock at 35 sen. It just hit 34.5? Hmm.. perhaps you should wait a bit for a rebound. By the time you're done with this thinking the stock probably would have collapsed to 30 sen, thus rewarding you with an extra 5 sen per share loss.We've gone through this scenario countless times - we're still learning.

The only way to prevent this from happening, or at least minimise its frequency, is to be self-aware of the mistakes quickly. We set very rigid, unbendable rules nowadays. Self-discipline has to be mastered; it does not come naturally for most of us, especially in a high pressure trading context.

So always write down your trading parameters and stick to them. Any breaches should be punishable by death (metaphorically). Even when you falter, always take notes to mark down your mistakes.

The next time you exited a bad trade at a huge loss, look at the catalogue of mistakes you've written down. You will find that the losses could have been minimised at every step of the way.

If you're not self-aware, you're bound to self-destruct.


8) The Biggest Gains Come From Playing It Safe & Boring


Consistent profits only happen when you execute your trading plan properly. When you have a winning trade, the temptation is always to try and maximise your gains. Even worse, you may be tempted to double down on your position, thinking that you're playing with the paper profits.

This is a fatal approach; doubling down simply means your profits can evaporate twice as fast. And if doubling down was never part of your trading plan at the beginning, you've also committed the lethal mistake of letting your greed take over your brain.

As an example, let's say you committed RM10,000 to a stock. It just gained 10% - fantastic. If getting out at 10% was part of your plan, you should exit and call it a day. Even if the stock immediately went up another 20%.

Because when this happens, we are naturally tempted to go back into the stock and chase the gains we didn't get. It's human nature to try and roll the dice. But if you're aware of this - the fact that your decision making is grounded in greed and foolishness, not logic - perhaps you will avoid doing this the next time.

Understand what parameters are for. For loss limits, we should never let them be breached. For profit targets, it's hard to exit and forego your extra gains, but trust us, it's the right thing to do. If you don't want to gamble with the losses, don't gamble with the profits. Value them for what they are; profits derived from a well-executed trade, not from rolling the dice.

IN OTHER WORDS...

Learning is a slow process. Like trading, you should never feel rushed. The process is incremental and can be painful at times. But stick to it and you may end up with some good stories to tell.




Wednesday, 2 January 2019

TRADE OF THE WEEK #3 - GLOBALTEC FORMATION BERHAD


 
We'll be honest - we didn't really pay attention to the company's fundamentals. But for a penny stock (it has since consolidated its shares), the company not only is somewhat profitable, it also has a snazzy website.

This was a trade idea that originated in about 5 minutes, and culminated in great gains. All within the first hour of the market's opening.


On 26 December, the company's newly issued warrant - GLOBALTEC-WA - caught our attention. Originally priced at 0.5 sen, it opened at 5 sen and immediately sped up to 9.5 sen within 10 minutes. A 90% gain.


We went in after that. Bloody hell! You may say - how can we buy a warrant after it has already doubled in value?


On a side note, we didn't have a predetermined attack plan or whatever. We just saw the price activity in Bursa Malaysia's top gainers. We thought the warrant looked interesting.


Now we'll let you in on a very important secret. Our potential success in this trade boiled down to three very simple questions:


1) Can it stay above 10 sen and for how long?


2) How far can it go beyond 10 sen?


3) Does the warrant look good enough to attract buying interest?


First, we decided to go in because there was sustained buying interest at the 10 sen level. By this we mean that somebody's buying small lots, and at the same time liquidity remained low. This is characterised by typical buy-sell queue at the time:


Buy - 0.105 - 0.12 - Sell

It was that kind of warrant - very intriguing really. Low-ish volumes but it kept going up. Low liquidity but no real collapse. Now for the fun part - disregard the fact that GLOTEC-WA is already trading at 110% its opening value. By 9:15AM.

We were confident that there is still upside, although it definitely would be temporary. We define that window of opportunity as our 'time stop' - this trade has a limit of 3 hours to work. If it doesn't, we exit.

The second parameter : we will buy in at 10 sen and above. Our immediate exit point is at 10 sen. with each half hour, we raise that exit point by 0.5 sen - assuming a sudden decline hasn't already triggered a hasty exit for us.

THE TRADE 

A minute-by minute chart in GLOTEC-WA, 26 December 2018. As you will see, we sold near the peak.
 
So we ended up buying small increments. We entered at 10, 10.5, 12, 12.5, and 13 sen, ultimately ending up with 90,000 shares. It's a fairly risky position, given that the average buy-sell queue was around 15,000 shares at the time.

To simplify, we were risking about RM2,000 in losses for the opportunity to gain RM4,000 in profits. Our average price for the 90-lots position turned out to be 12.5 sen; we were looking to exit at 15 sen per warrant. Anything more would be a bonus, of course.

We acquired that stake between 9:18Am and 9:36AM. Fluctuations were good (think of a normally beating human heart). We took up some warrants at 13 sen and prices fell to 11 sen; it didn't faze us. Though to be honest, we were ready to bolt if it became clear that a collapse was imminent.

What boosted our confidence was pretty simple. During a 10-minute period of downward pressure, there were substantial queues at higher prices. We can't recall the exact amount, but it's something like 1,000 lots each at 12.5 and 13 sen; at this period the warrant was trading at around 11.5 sen. Those sell queues were cleared rather quickly, meaning that the warrant was poised for a breakout.

We remained calm and stayed on standby to sell. The main question at this point was how far the warrant can go.

It went far enough, as it turned out. Low liquidity, coupled with solid buying interest, propelled GLOTEC-WA upwards very quickly. We reached our 15 sen selling threshold, but there was more buying, still.

Prices momentarily remained strong, with heavy volume, at the 16-16.5 sen level by 9:44AM. This gave us enough time to dispose the entire 90,000 warrants position in one shot. 

As you can see from the chart right above, that was the best that it got for GLOTEC-WA on this day.

The key to our success was as follows:

1) We anticipated a rally and assigned sensible loss-stop and time-stop parameters quickly.

2) We timed the exit properly based on our analysis. It was partly intuition, but we sensed that the buying interest will peak at above the 15 sen range. (Editor's Note : warrants traditionally follow the movement of their underlying share. But in this instance, GLOTEC shares didn't really go anywhere. This meant (for us) that the upside is capped).

3) We also knew that because of the finite liquidity, this sort of rally won't be sustained. And yes, we have been in these kinds of situations/trades before; we knew what we were doing.

The outcome of this trade was amazing. Again, we have to mention that this trade lasted all of 26 minutes.




OUTCOME
Gross profit : RM3,600
Average Return on Investment (ROI) : 32%
Duration :Intraday (26 minutes), first hour of trading




Tuesday, 25 December 2018

TRADE OF THE WEEK #2 - HSI-H4O (PUT WARRANT)

Note : The 'Trade of the Week' series showcases an interesting recent trade to highlight winning strategies in a basic, short form format. Not all trades deserve a long form writing treatment; some readers may also prefer a quick read. 

There will be no external links in these posts; we also hope you can read candlestick charts to get a better sense of our market timing. 


The Hang Seng Index (HSI) is a perfect proxy for all that is happening in the world's markets right now.

Like Japan's Nikkei, most of the time it takes its cue from movements in the US markets (S&P 500 and the Dow Jones). There are tangible reasons for this - many HK-listed companies have direct business interests relating to the US, like Apple's parts suppliers. It is also proxy to the ongoing trade war, given that the largest HK-listed companies tend to have sprawling businesses in mainland China; Tencent and the biog property developers, for instance.

We are not experts on Hong Kong or China's markets. But we do study the index movements closely. We especially like the correlation between how US markets perform and how the HSI would be impacted as a result.

We are of course aware of all the headlines generated out of the US, and the current fears in the market. We read the same papers and check the same Twitter accounts as you do.

To overly simplify our approach - and without giving our secret sauce away - this is what we tend to check before deciding whether to trade (Editor's Note : the timezone is Malaysia, +8 GMT) :

1) Last night's US markets performance (any decline of above 1.5% will trigger alarms for us).

2) The top headlines over the past 24 hours globally - we get everything we need from Twitter.

3) US markets futures after closing - the crucial hours between (1) and Hong Kong's market open.

4) 'Pre-market' prices for HSI warrants, both calls and puts - the crucial 30 minutes when Bursa Malaysia opens (9AM) prior to Hong Kong's market open (9:30 AM).

Because of the direction of the global markets right now - you know which way that is - we are more interested in trading put warrants. The reasons:

1) Liquidity and volatility is assured (unlike Malaysian stocks/warrants during this current market phase)

2) Real momentum exists (unlike Malaysian stocks/warrants, whose upward trajectory tends to be interrupted in a bad market).

3) Nothing else is gaining (when everything is declining, only put warrants look attractive. Hence, other people would be inclined to trade them too, resulting in situation (1)).

In December 2018, the put warrant that we usually trade, HSI-H4O, tends to be heavily and actively traded. It is incredibly sensitive to movements in the underlying - the actual Hang Seng Index - while liquidity is virtually assured. It is a good product; we take our hat off to Macquarie Capital Securities for producing such a reliable, tradeable warrant.

You may be wondering: why choose this warrant? To us, it's simply because it has good liquidity and constantly reflects actual movements in the underlying index. Many call and put warrants out there tend to have one or the other but not both. Through painstaking research and observation, we chose this particular put warrant.

And one last thing : we trade put warrants on an intraday basis. Hence, we don't have to look at the technical characteristics of the instrument (things like exercise price, theoretical breakeven point, implied volatility etc). Our time frame for trading this is very, very short.

One last, last thing : trading HSI put and call warrants is very risky. You need to be certain you know what you're doing, otherwise your P&L may be down to sheer luck. The approach that we're describing here is just one way of trading them safely and profitably. Your risk appetite may differ to ours, but we hope this trade can generate some ideas for you and lead you in your own research.

Here we will describe two separate trades for the same put warrant, HSI-H4O.


The Hang Seng Index, daily price movement in December.

TRADE #1 : 20 DECEMBER, 2018


5-minute candlestick chart, 9:00AM to 11:25AM.

We wanted to be in a trade on this date because the night before, the Dow closed at a new low for the year. At 9AM, HSI-H4O opened at 36 sen to reflect this, an increase of 9% from the previous day's close.

While wary of the potential fallback, we were keen to take a position. Hence by 9:21AM we bought in at 35.5 sen and 36 sen for a total exposure of 60,000 shares.

But in the next hour we were swept into a wave of unwanted downside volatility. The actual index rallied for a short period, driving down put warrants to an intraday low. Our put warrant position was suddenly staring at a 7.5% paper loss.

Actual Hang Seng Index price movement, 30-minute chart. The downwards movement means profits for us.


In moments like this, we don't panic (although the inclination is there).  We took emotion out of the equation and made a logic-driven decision: if prices do not recover by 11AM, we will exit this position. The movement in the put warrant already threatens to invalidate our expectation for going into HSI-H4O in the first place - we had expected it to hit a peak of 38 - 38.5 sen.

By 10AM, it was clear that the upsurge was shortlived; the put warrants went back to 35.5 sen. Seeing this, we were willing to stay a bit longer in the trade.

Then the moment came : at 11AM the Hang Seng dropped 1% (see the big red candlestick right above). On this day, the correlation exists: the Dow Jones fell 1.5% the night before, after all.

HSI-H4O also rocketed upwards to 37.5 sen; a 5.6% gain in 10 minutes.We decided to exit at this price.

The reasons for exiting are simple: we were indeed fortunate to have derived profits at all. The downward volatility showed that we didn't enter at an optimal price point, thus undercutting our potential profits. And because of that volatility, we didn't have the luxury of waiting until the put warrant hits 40 sen (our best case scenario). Short term upward bursts are the perfect selling opportunity; indeed, it is when everyone else is buying.

HSI-H4O closed at 38 sen that day. We were happy to exit from this trade, lasting all of 2 hours and 20 minutes. Thematically, we would be looking at the put warrant with a fresh perspective the next time we decide to jump in.

As we explain here:



TRADE #2 : 21 DECEMBER, 2018

5-minute chart, 9:00AM to 4PM. Notice the huge range and volatility!

US markets went through another bad day, losing around 2% in value overnight. This spelled trouble for Asian markets.

As expected, HSI-H4O opened higher at 40.5 sen, or a 6.5% gain from the previous day's close. It actually went further to 42.5 sen by 9:10AM.

But this time we weren't too eager to go in. For obvious reasons - if you're into technical analysis - 40 sen and above is not a good price point to enter; there may be selling pressure to drive it below this resistance point. It would be ideal for us to get a position in below that, so we nibbled a bit.

When the put warrant headed downwards, it presented a buying opportunity. We bought small positions at 38 sen and above based on simple parameters; either it goes back to 40.5 sen or it doesn't. For reference, we would be happy to cut our losses at 36 sen, coincidentally our entry point from yesterday's trade.

Based on experience, we were acutely aware of two things:

1) If the warrant quickly went back from an intraday low to a position of strength (in this instance, from 38 sen to 40.5 sen), there is a real possibility of further strengthening. This is the characteristic of the underlying index, of course, not just the put warrant itself. Fear is a key driver for the market during times like these, so this kind of volatility is to be expected.

2) But if the move happens, and happens quickly, it is time to sell. It is the only moment to know for certain that we are selling when everyone is buying - it is a limited window of opportunity.

So HSI-H4O subsequently went back up to 40.5 sen. We managed to buy some more at 40 and 41 sen, expecting the put warrant to at least reach the prior intraday high of 42.5 sen (this principle is based on our description of (1)).

Being aware of (2), we decided to count our blessings and run. We sold at 42 sen for a profitable trade lasting just over an hour.

Remember that volatility is not the same as momentum. We have learned from bitter experience that holding on for longer translates to much more risk assumed (Editor's Note : on this note, we also believe that you should NEVER hold on to any overnight position in HSI warrants, no matter how strong the momentum is. What happens the next day will be a 50:50 option between profits and destruction; there's just too much risk involved).

It was the right decision to exit. For the rest of the day (after we sold at 10:08AM) the put warrant practically collapsed. It fell to a low of 33.5 sen by 4PM. Had we stayed, we would've risked a 14% loss.

At the end of the day, in each of these trades we took the safest route possible. There is no point waiting for bigger gains if you're risking even bigger losses.

We didn't say it was easy, but if you have the opportunity to make RM1,000 in an hour from trading, would you take it?




OUTCOME

Gross profit : RM2,880 from two trades
Average Return on Investment (ROI) : Above 4.5%
Duration : Intraday