Monday, 19 February 2018


When you open a trading account, it's most likely that the following scenario has played in your mind on an endless loop : I can't wait to buy a stock and make 20% - no, make that 50% - profits in a week. I just need to do this 10 times and eventually my RM2k will turn into RM1 million!

When your broker tells you to buy 2 million shares in that one Sarawak based timber/furniture penny stock company.

Well, we know that's not really how it works. But our minds are predisposed towards over-optimism, especially when it comes to appraising our own ability to make money. Everyone thinks they can beat the market, but they underestimate the challenges that come with trading. Again, if you can't make more than 7% per annum from personal stock investments, don't waste your time - throw your money into mutual funds, fixed deposit, ASB, Tabung Haji, etc.

Over-optimism fuels the capital markets. It compels us into making more and more trades, buying stocks using margin, or putting absolute blind faith in cryptocurrencies. Short term trading for immediate profits will always be the holy grail for those looking to make a quick buck.

But if you're reading this, I'm sure you'd love to make a quick buck, just like me. Having that desire is not inherently a bad thing - repeating stupid trading mistakes and blowing up your capital are bad things.

I experiment with different strategies in my trading approach. Despite my many biases, I try very hard not to discount any and all approaches, be it fundamental, technical, volatility driven, or event driven. I force myself to take extensive notes of all my gains, losses, mistakes, and weird correlations that I see on Bursa Malaysia (which can turn out to be lucrative trading opportunities).

By adopting an empirical process, from time to time I'd come across such a proposition - the opportunity to derive huge short term gains. It's inherently risky, but the risk-reward proposition was such that it's worth entering these types of trades. It's not for the faint hearted.

Let me stress this : the opportunity is there, but the ability to capitalize on it is a burden that falls squarely on the trader. Do it right and you can achieve a 30% return on capital within 48 hours. Do it wrong and you'll lose just as much, if not more.

With this post I'd like to bust one market myth by showing you that it is possible to derive such gains repeatedly. There are always pre and post-trade justifications, but such short term trading always requires a trader to act with very limited information. The rally precedes the news, or it could be the other way around. Sometimes it's purely technical - no news necessary.

The real art is basically scenario analysis backed by empirical research - have I seen this situation before? If I can reasonably estimate what's going to happen next, how do I trade? How big of a position should I put in? How long to stay in? When do I get out? Am I going in at a good price, or a stupid price?

Here's the burden - you have to answer these questions intuitively, and very, very quickly. Short term trading to make a quick buck isn't the result of pure speculation or dumb luck - it comes from painstaking research and homework.

Eight months of trading on my journal from last year - around 120 days' worth of entries out of 160 trading days during this period. One square represents one/two pages of extensive observations and comments.

But enough of that. Let's look at some examples. I'll explain the trades as best I can. These are trades lasting two days at most, so 12 hours maximum (if you count only the trading hours, excluding market breaks). RGL = realised gain/loss. Shown below are absolute net profit values (before fees) and percentage gains from capital invested, or ROI. I usually have a profit target of 30% on higher risk short term volatility trades.


DURATION : Two days.

PRE OR POST-TRADE JUSTIFICATION? : Pre. I didn't need the news to enter this trade. It was mostly down to price activity.

DESCRIPTION : My only significant edge in this trade is that I've been waiting for Hibiscus call warrants to come out (as a general rule, a stock must carry an average market cap of at least RM1 bil over three months until an investment bank would consider issuing the calls). Another significant factor was that the firm's shares have been steadily declining from a high of RM1.17 on January 16, 2018.

The call warrant, CA, came out on Feb 13, at a time when the mother share has fallen close to a two-month low and a 35% decline from the peak. Mispricing in call warrants tend to happen when the mother share is in a slump; buying them in anticipation of a rebound skews the risk-reward ratio in my favour (low upside, excellent short term recovery prospect). I'm also aware of the fact that Hibiscus is about to post its latest earnings by the end of February. It's good for sentiment if nothing else.

THE TRADE : I bought CA as soon as Hibiscus breaks the all important 80 sen mark (it was at 76 sen the day before). My initial expectation was for the stock to modestly rally to 85 sen over the next week. Instead it went up to 98 sen within two days. For all intents and purposes this was a technical trade - the sudden shift in price and volume activity was all I needed to enter this trade.


DURATION : Two days.

PRE OR POST-TRADE JUSTIFICATION? : Pre. Another purely technical move. But this one was driven by a price breakout (a rally to new highs), unlike Hibiscus-CA which was all about price recovery in the mother share.

DESCRIPTION : I've written about this trade in great detail here, in the final section.

THE TRADE :  I missed out on the great DRB-HICOM rally of January 2, 2018 (the stock went up 23% in a day. One one the call warrants? Up 781%). The anticipation of another breakout was there; all it took was a steady consolidation phase and a supportive broader market. Both were around when the price breakout occurred, and I was ready.


DURATION : Three hours.

PRE OR POST-TRADE JUSTIFICATION? : Pre. The news came out later. Indeed, the stock moved before the CEO opened his mouth - perhaps somebody knew something in advance.

DESCRIPTION : This was on January 23, 2018. Look at that lovely spike on the left; that's the call warrant moving up by 78% in one day (16.5 sen to a peak of 29.5 sen).

So what caused it? The first supportive indicator was the mother share itself. It was trading near all time high levels on the same day. It had been consolidating at around RM9.20 since January 2. Did some positive glove related export data came out? Did the ringgit crash that day, thus improving sentiment towards exporters? No and no.

The only thing that happened was that piece of news in the prior link: the CEO says he will acquire more companies. It was enough to drive the stock nuts. My competitive edge, if you can even call it that, was this. I liked to tell people that I managed to benefit financially from this event despite not attending it.

 Top Glove session, January 23, 2018.

My background in finance journalism means that I'm acutely aware of potential market moving events (this also includes key dates for company EGMs and earnings disclosure announcements). I know that there were instances in the past when these types of corporate presentations were enough to propel stock prices; the disclosure of new and positive information always helps. I didn't know what the CEO was going to say, obviously, and I didn't wait. If I did I would've gone in at a much less profitable entry price.

 Note the timestamp : 3:18PM. I was in the trade in the morning.

So again, all the pieces (somewhat) fit : a good stock, a reasonably priced call warrant, and a possible kicker for the stock itself (the corporate presentation).

THE TRADE : I acquired the call warrant within a few minutes of the mother share breaking a new high of RM9.25. I finished accumulating my position at around 20 sen and sold it at 29 sen (never aim for 30 sen - that's the so-called resistance barrier, as the chartpeople would tell you). The volatility was such that taking profits was a necessary move. I fully understood that this was a one-time occurrence.


DURATION : 1.5 hours.

PRE OR POST-TRADE JUSTIFICATION : Post. On January 30, 2018, when this trade was made, Lotte announced its latest earnings and dividend. In many instances, the dividend component of the earnings disclosure (despite being fully expected - Lotte's dividend policy is 50% of annual profits) tends to propel the stock to new heights, albeit temporarily. The trick is finding a suitable call warrant to ride on this angle.

DESCRIPTION : I was slow to realize the ramifications of the earnings announcement which was made during the afternoon break. In fact, I got in at a lousy position. Had I been more decisive and entered the trade just minutes earlier, I would've stood to gain RM6-7k. This trade was purely news driven, and the volatility was expected to be brief.

The call warrant, CG, spiked from 3.5 sen to 14.5 sen on January 30 - a mind-boggling 300% one-day increase. This was mainly because CG has done nothing but decline since inception; the rally was in reaction to the one-day shift in volatility. Think of it in terms of what happened to the VIX shift recently.

How brief was the volatility spike? Since then the call warrant has gone back down to 3.5 sen as of February 15, so don't bother chasing it. CG has lost 75%, but the mother share is only down 6.5% since January 30. This is mainly because the call warrant is close to expiry and no longer has utility as a trading instrument.

THE TRADE : It was fairly brief and I got in at a lousy price - 11 sen (remember that this was after the call warrant tripled within half an hour). One purely technical indicator was that CG did not immediately touch down below 10 sen, indicating a continuing surge in buying interest. I sold everything at 13.5 sen as my experience with price/volume analysis indicated that the rally will peter out quickly. CG closed at 10.5 sen on that day.


DURATION : Three hours.

PRE OR POST-TRADE JUSTIFICATION? Pre. There was literally nothing driving the stock on December 13, 2017, when this trade was made.

DESCRIPTION : My only advantage in this trade is that I've had Vitrox in my watchlist for four months. I was keen on accumulating a Vitrox call warrant as a medium term fundamentals trade, but the excess volatility meant that this angle had to be abandoned as it morphed into a short term trade. The other main indicator was that the mother share recently recovered from a slump. On this day it unexpectedly broke a new all time high of RM5.91.

THE TRADE : There were several Vitrox call warrants at the time; I was actually observing VITROX-CA, but liquidity considerations (no trading interest in CA) meant I had to scramble to find a substitute. CD fits the bill as it was trading at 16.5 sen from a peak of 24 sen before. A price target of 20 sen was perfectly reasonable in the event that the mother share itself continues to recover.

My approach in this trade was rather conservative, so I ended up missing out on a huge chunk of the eventual four day rally in Vitrox shares. When the share hits RM5.91 you have two choices : take profits before it tries for RM6 or hold on in anticipation of it breaking that price point. Having observed the shares for a long time I was aware that the stock exhibits high volatility tendencies - it jumps around a lot and price stability is never guaranteed.

In the end I sold my warrants at 23 sen, a solid return from my entry price of between 17 and 19.5 sen. In the subsequent days CD actually went all the way to 30 sen. But it's OK - you'll never go broke taking profits when the one-day yield is a ridiculous 37%.


DURATION : Two days. It was sold this morning (February 19, 2018).

PRE OR POST-TRADE JUSTIFICATION : Post. This trade (basically a continuation of (1) ) was a way to stay in Hibiscus following earlier profits. So it is purely technical driven.

DESCRIPTION  : This trade is what is known as 'scalping', or trading the spreads to achieve immediate profits. This basically mean buying in size at one price and selling it off at the next 'tick'. Some people do it in size : buy 1 million warrants at 8 sen, sell it off at 8.5 sen and you'll make RM5k. I saw limited downside based on the existing price of CC, a newly issued warrant.

A warning though : never scalp unless you know what you're doing. In this instance I was perfectly OK with disposing the position at breakeven (8 sen). The profits from this trade was the culmination of scenario analysis, and it was most likely the best case scenario.

The stock's rise coincided with the recent rally in crude oil prices as well as the KLCI itself. These are supportive of sentiment, so there was a realistic chance that the buying would continue.

THE TRADE : After disposing Hibiscus-CA earlier on Thursday (February 15), I noticed that the buying interest in the mother share didn't cease. In a short burst of illiquidity, the stock hit a peak of 98 sen before retreating. Yet it never retreated to the day's open (92 sen) or the previous day's close (90 sen). The 'gap', as seen above, was a clue that the stock may realistically attempt to break the RM1 mark.

So you have a situation where the conditions are favourable ; a good macro environment (a recovery in both the KLCI and crude oil), good technicals (the 'gap' and sustained buying volume) and a clear grasp of what to expect (the stock will attempt for RM1. Doesn't matter if it stays there; there's enough time to achieve that 6% yield).

I managed to sell the warrants at 8.5 sen to lock in that yield. The KLCI rallied further and Hibiscus broke the RM1 mark. Beyond this you may want to finally incorporate the fundamentals angle (the expected positive earnings by the end of this month), but that would be a different kind of trade.

Note : As of 11AM today, CC actually hit 9.5 sen.


Obviously these are the best-case scenario trades. I have a multitude of losses from short term trades that didn't work out, but the magnitude of losses are much smaller compared to the gains shown in the above examples (I tend to lose far bigger amounts for holding on to trades for too long). On trades that don't work out I try to cap my immediate losses at below RM1k. I'll probably dedicate a future blog post just for the losing trades and the lessons learned (they are much harder to write about, for some reason..).

But given the chance to make a 30% profit, should a trader be willing to lose 5%? Absolutely.