Tuesday, 24 September 2019

TRADE OF THE WEEK #22 : PENTAMASTER CORP BHD



Outcome

Gross Profits : RM13,300
Return on Investment (ROI) : 20%
Duration : 7 days


It's been three months since our call on PENTA*. Since then, our gross profits have accumulated to RM20,000. It's one of those car-sized profits we try to hunt for every year. If we can get a few of these each year, we'd be pretty happy.

We did not conceal or kept anything to ourselves in our coverage of the stock; every inch of our thinking is on this blog. We just thought it was a good company with all its stars neatly aligned.

And when the stars do align, it always makes for a very powerful trade, and our eventual profits have not disappointed. And we're not saying the rally is over; did you notice that it has only been three months??

Since flagging this stock, we have discovered some interesting things:

- it is the best kind of momentum stock relative to the market. When the stock market declines, PENTA declines at a lesser rate. When the stock market recovers, PENTA rallies much, much farther.
- it is a clear leader in the broad tech sector category for companies of its size.
- it's closely correlated with FRONTKN, another of our top picks which we have not been smart enough to buy into recently. We do tell our readers about it constantly in the Telegram group, though.
- over the past three months, PENTA has returned 33%. The FBM KLCI? Down 5%. 

The alignment of stars that we mentioned was also very straightforward. You don't have to be Svengali or Sherlock to realise this. We realised it, and we are not smarter than you. We just took note of it and did our jobs. 

- fundamentals remain solid.
- technicals (the price chart) were favourable, especially in the context of this trade.
- market conditions paved the way for a blistering rally (that window of opportunity opened).
- our timing was impeccable as we correctly anticipated the breakout in the stock price.
- we had the perfect instrument to trade this in order to express our view.


THE TRADE

There was really one thing that made this trade stand apart - the timing. We nailed that not out of luck, but preparation.

After a flattish post-earnings performance since the end of July, the daily chart for PENTA looked like this.

As at 11 September 2019.

What looks like a disfigured 'M' is actually a representation of PENTA stock reacting to different stimuli. The first one is the post-earnings blues; the 'sell on news' adage was well and truly alive.

Remember our earlier trade in PENTA-CB? We sold that after the stock retraced from RM3.75 to RM3.40 in early August. Poor form on our part; we sacrificed about 6 sen per share in profits for that one. Yes, we sold at the bottom, at least in a three months context. But that's a forgivable sin; we met our profit targets and exited with dignity.

Notice the first two peaks of this 'M'? They are failed breakout attempts. If you really want to picture it, it's essentially a bunch of uncles trying to drive PENTA stock beyond that RM3.75 range, only to be met by selling pressure by sellers (possibly uncles who are institutional traders) both times. That resistance point was Normandy on D-Day; the Allies are being repelled by Nazi firepower. (Editor's Note : we're not trying to compare institutional traders to Nazis...).

Another factor you should know: during the time period captured above, the markets also underwent a mini-Doomsday scenario. Stocks in Hong Kong and the US were hit hard by potential market crash jitters and Trumpian B.S. ; these are not new things, but they hit hard regardless. Such concerns drove down prices of stocks in the volatile tech sector, and PENTA was no exception.

The second failed breakout was when we started paying attention again to the stock. It had been just a few weeks since we got out of PENTA-CB. Buying into it again was not an option due to the low liquidity and low trading volumes.

It's also priced much higher than at the point when we sold it, so we felt icky about buying into the same warrant at higher prices. That love affair was over; it was time to seek a new date.

We found true love with PENTA-CG on September 11 (Editor's Note : never thought we'd write that sentence in a million years...). It was a quick introduction, companionship, and consummation of marriage. We bought into the warrant in a big way on the 12th, just one day after it made its market debut.

There was really no need to wait; this bit of timing made all the difference. We ended up finding the right trading instrument, but more importantly, we successfully executed this trade at the right time.

We were anticipating PENTA to break out strongly beyond RM3.75 when we got in. Third time's the charm, but there was also something else that went in our favour.


Whatever this is, we love it. Source.

TIMING IS EVERYTHING!

That something else is this : positive market conditions provided a window of opportunity for stocks like PENTA to rally onwards and upwards.

While markets were abuzz on the Saudi oil attacks an implications for Malaysia stocks, we were also counting on the leading tech players to outperform.

Here's the thing about PENTA and FRONTKN, regardless of whether you have full conviction in their fundamentals or not. Both stocks will do well in a good market; by this we mean an active market with enthusiastic buying and selling of stocks, and some prominent leading counters.

A good market is not just about whether the KLCI is positive or negative; it's also about the breadth of activity in Bursa Malaysia stocks. A rally in crude oil prices is typically positive for Malaysian stocks; you're probably aware of this.

With the right timing, the right instrument and the right market conditions, we were able to achieve significant profits. The chart below illustrates what we mean.


It was important that PENTA-CG was newly listed when we bought it on 12 September. It made its debut on 11 September, just the day before.

It just so happened - and this is a coincidence - that PENTA stock exhibited signs of breaking through to a new all time high after two solid months of consolidating, trying and failing. We were very comfortable to take up a large position in the warrant just to get exposure in this angle.

Because we were early to get in, we managed to enjoy a profit buffer of 1 sen per share from the outset. We first entered into PENTA-CG at 15.5 sen, and by the time the breakout happened - as we anticipated - the warrant was already trading in the 16.5-17 sen range.

We had not been constantly watching the stock since July, by the way. We only began paying attention again after the stock made a strong move up from RM3.50 to RM3.70 within days.

As one of our favorite sayings goes, "if the stock wanted to collapse, it would have done so a while back". But it did not, and the repeated signs of strength and buying interest made us pay attention.

On 12 September, PENTA stock broke a new all time high and practically never looked back. This particular breakout was good for a 13% gain within a single week; it was a very strong move. (Editor's Note : as a general rule, the longer the consolidation phase, and the more failed previous breakouts, the eventual breakout move would be much stronger).

Recall our previous posts on the importance of creating profit buffers. In PENTA-CG's case, ours were large enough that they allowed for further accumulation of warrants. We bought a large position at the 18.5 sen mark, with a view towards the warrant breaking 20 sen. This it did within a couple days.



You may think we were lucky to have found the right timing and the stock just so happens to break out. We'd partly agree, but we were also thoroughly, fully prepared.

How do we prove this? Simple: this trade uses the exact same trading strategy that we had shared in our first PENTA post back in July. It is literally the same angle: newly listed warrants, good company prospects, good charts, positive catalysts.

The only difference? We traded a different warrant. Indeed, this strategy can be replicated for future trades, and for different stocks. You just have to find one with similar circumstances, and that confluence of factors culminating in a trade with massive profit potential.

This is the true power of warrants trading. By choosing the right warrant, and under the right conditions, you can boost your profits sky high.

For PENTA-CG, our holding period was just under a week. We fully exited on 19 September.





This is worth repeating: 20.5% yields and RM13,300. From one Thursday to the next.

It all stems from one good idea and some good execution. Really, anyone can do this.


*Our PENTA series of posts for further reading:


9 July 2019 ~ PENTA stock was around RM3 at this time.

PENTAMASTER IS HEADING FOR THE SKIES : BURSA MALAYSIA STOCK ANALYSIS


7 August 2019 ~ 1st round profits of RM7,700

TRADE OF THE WEEK #18 : PENTAMASTER CORP BHD














Friday, 20 September 2019

TRADE OF THE WEEK #21 : HSI-H6Q (HANG SENG INDEX PUT WARRANT)


When light goes down, I see no reason
For you to cry. We've been through this before
In every time, in every season,
God knows I've tried
So please don't ask for more.
~ "Carrie"


Outcome
Gross Profits : RM1,750
Return on Investment (ROI) : 12%
Duration : Intraday


At the risk of turning into a Hong Kong blog covering Hong Kong things only, our foray into trading Hang Seng index warrants continues. We've written a few lengthy posts on this topic, from the broad and simple to the narrowly complicated.

This particular trade was only notable for the fact that it was down to pure luck. Yes, it happens sometimes. We try to make peace with this.

While we are proponents of the 2:1 reward-to-risk ratio, we can stretch the thresholds a bit when our trading stake is small. Given that we were dealing with the most volatile trading instrument on Bursa Malaysia, sometimes we fail to follow our own rules. We're only human.

Below is an illustration of our purchase point, and why we were willing to temporarily ignore our tight stop loss thresholds. 

The rationale for this trade is simple. The 'gap up' as seen below is an indicator of bullishness. So we started building a stake. At the time, the Hang Seng was in the doldrums and has been for a fair number of weeks due to a confluence of negative factors, mainly the Hong Kong protests and a recent downturn in global markets. 


Since the trade was done, the index has jumped by more than 1,000 points.


The gap open in the Hang Seng encouraged us to stay invested. There was a decent decline in the markets of about 0.4% or so in the opening hours of trading on 5 September 2019. Over a 40-minute period, we managed to build a stake totaling 70,000 put warrants.

HSI-H6Q, the put warrant in question, actually fell steeply after we got in as the market suddenly stages a strong recovery. It was down 19% at its worst point, from a nice peak of 23 sen to 18.5 sen. Our temporary paper losses were in the RM1,000 plus range as of 10AM as the market continued rallying. (Editor's Note : remember that the put warrant correlation is inverse : a rising market means a deterioration in the value of our put warrant position)

At this point, we were faced with two options: dump everything or add to the position. This is where we have to admit that we were not abiding to the rules. If we had a threshold for an exit, that point had passed. 

In our minds, we had already absorbed the paper loss as a real one. Guided by instinct, we decided to grow the position at 18.5 sen with a purchase of 25,000 warrants. A reminder, though : instinct is always a lousy excuse for not following the rules.

You can see below that this bold move has a happy ending, but we will explain our thinking for this trade while admitting that luck played a prominent role in the outcome of this trade.





LUCK, AND GETTING AWAY WITH IT


Here's a list of the myriad ways in which we were wrong. 

This was considered a mean reversion trade. Having gained an astonishing 4% the previous day, our wager was actually on a decline in the Hang Seng; perhaps by 1.5%. As you can see in the charts, we were completely wrong about that. 

We were wrong that we did not set aside solid thresholds as viable stop loss points. In effect, we underestimated the volatility of the index, exposing us to that 19% paper loss. 

We were wrong about the direction of the market and followed our biases. A large upwards move in the Hang Seng can mean either of two things : capital flows are well and truly back in, or that it was just a temporary bounce. We thought it was a bounce, and we erred in our judgment spectacularly.

One of the reasons we wanted to be contrarian in the first place was due to the very sharp fall in H6Q the day before. As you may be aware, this was due to Carrie's (bless her!) announcement that the government is proposing to withdraw the much maligned extradition bill. As it turned out, it was a bloody poor timing to be contrarian. Since 4 September, the index has pretty much gone up and up.

Back to the morning of the 4th at 10AM. Shortly after, the price and volume movement in H6Q was enough reason for us to stay in. At the aforementioned 18.5 sen level, our expectation was for the warrant to return to 20 sen, in effect creating a profit buffer of sorts for this newly assumed stake.

Given that H6Q closed at 21.5 sen the day before, we know that there is a strong tendency for the warrant to return to status quo levels. This is called mean reversion. 

As it so happens, the warrant returned to 20 sen levels shortly before the midday break. We were roughly breakeven at this point, covering our entire paper losses. 

The chart below shows the price fall in H6Q on 4 September as well as the price activity on the 5th: the warrant indeed closed at breakeven. 


In effect, our profits were down to our success in catching the trade at its extremities. Somehow we ended up buying some of the put warrant intraday lows (18.5 sen) and managed to sell at close to intraday highs (23 sen).

As you can see here, something happened during the midday break that allowed us to be bailed out, at a nice profit, by the 2:30PM re-opening. The put warrant made a 'gap up' move, and we quickly got out. For the rest of the day, it slowly descended back to 21.5 sen. 





So what made the markets jump? Well, it's this. Derivatives trading was halted for the rest of the day due to a cyberattack. Traders in Hong Kong could not place their orders. The futures market was closed but the cash market (the actual index) was still quoted*.

Between 1PM and 2:30PM, as the Hang Seng reopened for the afternoon trading session, the index plummeted due to this anomaly. Bursa Malaysia is not open during this time period of course, so the activity was only fully reflected by 2:30PM. Put warrants hit their intraday highs as the index plunged to intraday lows. We got out.

This was just a random occurrence that put us in a favourable position. We had a semblance of a trading strategy and all that, but the truth is we were bailed out by the market gods. That's it.



*technical explanation : the futures market is where large institutional traders do their hedging activities, sometimes to catch small short term profits.. They may buy a basket of Hang Seng component stocks and hedge that by selling short index futures. When the futures market shuts down, there is a risk that the position is imbalanced. A halted futures market means that some traders cannot get out of their intraday positions. To offset that risk, they may be driven to sell that basket of stocks bought earlier. In large enough sizes, this selling can potentially drive down the Hang Seng index itself. This is just one probability; the market ended up rebounding pretty quickly after this temporary selling.






Monday, 16 September 2019

CHOICE PARALYSIS : TOO MANY OPTIONS MAKES YOU A LOUSY INVESTOR


Let's talk about nasi lemak today.

Similar to Subway sandwiches or the Family Mart oden, nasi lemak is defined by customisation. The final output is the product of an assembly line offering limited but sensible options.

At the nasi lemak stall, your choices are broken down similarly: the carbs (rice), protein source (eggs, chicken, beef, squid, etc), the usual peanuts and anchovies, cucumber slices, and a dollop of shrimp sambal to top it off. 

These sensible options are not meant to disrupt the natural order of things.

Now imagine a totally radical take on the nasi lemak or Subway sub. A boundary-busting culinary enfant terrible decides to offer you unlimited options on what goes on your plate. Instead of normal nasi, this Roadside Ramsay offers you 15 different grain options to choose from as a base. Put in a bit of quinoa with that, or some Japanese black rice. 

Instead of fried peanuts, you can get 10 different types of nuts, cooked ten different ways. Boiled almonds, anyone?

Because we're too hipster for just sambal, perhaps you can replace it with kimchi that has been fermented for two years. Hot sauce, sriracha, you name it. Have the nasi lemak of your dreams. 

Your only limit is your imagination. But do consider that too much imagination can also be the absolute bollocks. 

To press our point, beware : the following photo is not safe for work. It will be the worst thing you'll see today. 


"Every day man dishonours his food..."


PARALYSED BY TOO MUCH STUFF

Have you ever sat in front of your TV browsing for something on Netflix/Astro channels to watch for a solid five minutes, only to end up re-watching an old episode of Friends that you've probably seen a hundred times?
Have you ever spent about an hour packing your clothes for a holiday trip, crippled by indecision about what to wear? 

We're not suggesting you should ditch the mankini for something that leaves a bit more to the imagination - that's your choice - but our point is that indecision can be time consuming. Having too many options can slow down your actions. 

Instead of doing, your thinking is hindering your progress. Choice paralysis.

It's the equivalent of the Jam Experiment which you can read more about, but the gist is this:



Too many choices can lead to bad output. When it comes to hipster nasi lemak, all you're risking are your digestive system and the boundaries of good taste. You've already gone past the part where your family has disowned you.

But in investing, you're risking severe financial losses, and just as bad, subpar returns.

Diversification and creativity are great, but only to an extent. Know the symptoms of bad decision making and perhaps you might be able to avoid them.

KNOW YOUR STRATEGY, KNOW YOUR LIMITATIONS

Another hypothetical; consider an ice cream man and a neurosurgeon. They are good friends; the neurosurgeon and her kids get free sundaes when visiting the friend's home. The ice cream man gets his endoscopic thoracic sympathectomy done by his good friend when he really needed it.

OK, but would you trust them to switch jobs? Absolutely not, right? The ice cream man would make a mess of people's brains. The neurosurgeon, in a far worse crime, would end up concocting bland chocolate chip ice cream.

 bad mix... (Source)

So why would you chase any stock and every stock in every sector? Do you know what you're actually good at? Are you a student of value investing or a dividend hunter? Are you a balls-to-the-wall short term trader or a safety-at-all-costs buy-and-holder?

Most retail investors are human beings (we think), and we tend to overestimate our capability as investors. We feel that we are jacks-of-all-trades, but we are not.

As active investors, we have the same fallibility. We know our strategies, yet sometimes we fail to abide by our own rules. We miss the trees for the forest, and our constant need for action and gratification - short term trades, that is - eats up on our potential profits. 

Case in point : the following is actually totally true. We refer to our GREATEC trade and a series of subsequent trades that netted us almost RM20,000 in profits. Sounds good right? 

Well:


Since the listing, we have encountered many good trading ideas and twice as many bad ideas. We did fine, although some of our choices have been sloppy. We remain vulnerable to emotion-driven trading sometimes.

Regardless, it is nowhere near as good as we would have been had we just sat on GREATEC and did absolutely nothing else since the stock listed. As of 13 September 2019, the stock has returned 149%. In three months.

While this is not meant as a criticism on our trading endeavours (though you can treat it as such, if you like), the point is this: having 50 good choices (potential trades) might not be better than having one truly great choice (GREATEC).

Early stage listings is one of our core strategies; it is why we had succeeded with many similar IPO situations. Our responsibility should have been to stick to our strengths, and fine tune that skill.

Most people, including us, tend to have more money than sense. Why do you think people do overseas transfers of RM500,000 to help their struggling long distance lover in Nigeria?

Here's our own version of choice paralysis. By (falsely) believing that there so many great opportunities out there, we end up making subpar decisions, which subsequently delivers less-than-desirable returns. 

Making too many choices is a constant activation of the senses; you feel the buzz of the markets and the thrill of executing a potential winning trade. We are hard wired into preferring this route, but we tend to forget that what feels good is not necessarily the right thing to do. 

Being fully aware of this weakness, we decided to take action. Rather than being serial traders, we have now limited our activity severely. From 15 really big attempts a month, we limit it down to less than 5. We no longer trade like this every month; we look at the market constantly, but we act rarely.

These big attempts are the trades which we expect to deliver close to five figure profits or beyond; they are not easy to come by. The GREATEC listing and our PENTA trade are two such examples, but these golden opportunities only come by several times in a year. 

Stock is up 33% since we wrote this IN JULY! Read more here.

We try to commit our capital to the very best ideas only; merely good ones are not good enough. We still do small trades to hone our price-volume analytical skills, but the profits generated are usually negligible, at least in the grand scale of things.

Eliminating choices is not a natural thing to do. Not trading for the right reason is immensely harder  than trading for any or no reason.

Refusing those endorphin shots that come with active speculative trading is not easy; think of it like somebody kicking a years-long smoking habit. You know the bad side effects but you can't help it.

You're correct if you figured that the key lesson here is 'don't overtrade'. But as the manager of your own capital, you also have to stick to your strengths. Know your weaknesses, and then find a way to minimise losses, maximise profit potential, and optimise your trading strategy.

So if you have a good record with trading oil and gas counters, having fully understood the fundamentals and sector dynamics, stick with that and hone that skill. If one day you decide to buy into a speculative tech counter of which you know little about, you're the same as an ice cream man dabbling in brain surgery. It will get bloody sooner or later. 

The other key lesson here is 'do your homework', but you probably already know that.

When interacting with our readers*, our answers tend to be questions : what's your profit target? What are your strengths? If you plan to go into a trade, what's the fundamental/technical/whatever justification? We do this to understand your thinking and motivations. We hope you have the answers to those.

We have many weaknesses; the first step is to be self aware. Rectifying them takes a long time, but the process itself helps.

If you see our shortcomings as similar to your own failings, be assured : when it comes to investing, we have failed much worse than you have, probably.


*Twitter or Telegram - join the conversation and reach out anytime!











Tuesday, 10 September 2019

BURSA TRADING TACTIC : MANAGING STOP LOSS LIMITS FOR INDEX WARRANTS

Key players in the global geopolitical scene.

(Editor's Note : this is by far our most technically complicated post to date. We are writing this for our own reference as much as it can be yours. Let us know how we can improve the content of this post if you have suggestions; we made an effort to provide as much clarity as possible).

As you may have seen in recent weeks, it's the season to be jolly - over the Hang Seng Index, that is.

We are trying to build up some credibility as specialists in index warrants trading. The HSI warrants has been a battleground for punters, technical traders, fundamental analysts, and idealists alike. 

The protests in Hong Kong right now have been historic in their longevity and effectiveness. Without diving into the political-military-socieconomic aspects of the unrest, let's just say that the protests have changed everything; perception on human rights  and civil rights, HK-China relations, lame duck special administrative governments, and last but not least, the stock market outlook.

This is Hang Seng season because the fall in the index has been swift and severe. While concerns persist, it is clear that panic comes in small doses. Having followed the index movement for a few years now, we can translate that understanding into a viable, and profitable, trading angle.

We have been making significant market calls in regards to the Hang Seng lately. We have traded on optimism (call warrant), pessimism (put warrant), contrarianism (buy when the market is selling down), and momentum-ism-ish (ride the wave, baby).

But today we are going to be a bit more specific. We have set out to solve an intractable problem that has plagued many a small cap, small fry, penny stock trading uncles for many years. We will explain a valuable trading tactic that will allow you to minimise your downside risk and optimise your profit potential.

It's not easy but it can be done. You just have to adopt a different approach than most people.

LET US STOP YOU HERE...

Index warrants trading is challenging. The price movements alone can leave you with motion sickness. Seeing your position drop swiftly - thousands of ringgit in losses within minutes - can leave you hospitalised. You may even start encountering Pooh and Piglet in your dreams, asking them to consider the protesters' civil rights and human rights demands (it must have been a plot line from one of their weirder TV episodes).

We have a whole bunch of resources and knowledge database for trading index warrants. We urge you to read them before moving on. The following topic is for intermediate traders, although you may find them useful in your own activity.
STOP LOSS - FOR BEGINNERS

We usually refer to it as a 'puke point'; the forced visualisation of this makes the term easier to understand for most people.

Essentially a stop loss is where you absolutely, positively, resolutely have to exit a trade. This point is somewhere below your entry price for a stock or warrant.

It helps to fully quantify the extent of your losses and the amount of losses you're willing to absorb in any given trade. RM1,000? RM2,000? Good - now halve that amount. Always be more conservative than you give yourself credit for - self assessment is an unreliable thing. 

More importantly, the stop loss is a tool to take you out of a trade against your better (worse) judgment. When under pressure, we tend to dilly-dally. We go into self denial mode: I'm losing 10% now but surely the position will rebound! 

No bro, not like that at all. If you don't set stop losses, your 10% loss becomes 30%. And once you hit that point, you may either give up or worse, take it down further to a 50% loss.
Just remember this: when your position is down by 50%, the stock or warrant actually has to increase by 100% just to wipe out your losses. Take our word for it; don't get into this situation. Swallow the pain at lower prices. Move on.


 Anonymous giant hand is correct. Listen to anonymous giant hand. Source.

Our mantra for trading anything is bloody simple:

2:1 reward to risk ratio. 

So we are willing to lose 5% in the value of our portfolio for the plausible opportunity to make 10% profits. It can be 5%:2.5%, or 18%:9%. You get the idea.

The concept is to measure your potential returns relative to the risk you are undertaking. If you're willing to incur 10% losses just to trade a speculative uncle counter that promises 10% profits, you'd be in deep trouble. The numbers don't jive, or to put it more indelicately, you're wasting your time.

Let's say you go into a stock at 8.5 sen. Your 10% profit target per share is roughly 9.5 sen. (Editor's Note: it's actually 11.76%, but still the closest absolute amount to 10%. Use this handy calculator to determine your profit and stop loss points).

On the other hand, to stay true to the ratio, your stop loss point would be 8 sen for the 5% loss limit (Editor's Note : it's 5.8% actually, but it's the most exact it can be at these low prices). So when you have these figures, your trading strategy is pretty much there.

Entry point : 8.5 sen 

Profit target exit point : 9.5 sen

Stop loss point : 8 sen 

You are willing to lose 0.5 sen per share for the opportunity to gain 1 sen per share.

Now you might wonder : I got my stop loss, so now what? The next step is to manage it. It is always, by a million miles, more important to manage stop loss points than when your position is profitable. Unknown punter uncle is right when he said "profits take care of themselves, losses never do".

STOP LOSS MANAGEMENT

There are two ways to do this. 

One is to keep constant watch on the prices. This is doing it manually; it is time consuming and doesn't allow for distractions. Once you see prices dropping, or when you 'get a feel' that the market is heading lower, you'd sell off at 8. You might get lucky or you might not; there's a risk that by the time you want to sell at 8, the stock has gone down to 7.5. Outcome : you'd be screwed (by an 11.76% loss, no less).

The other way is to set an automatic stop loss threshold. You can input this in your trading platform on your own - if you don't know how, ask your broker. This order essentially 'takes you out' automatically at the price point of your choice.

If your trigger is at 8 sen, when a trade is done at that price, your position will be dumped immediately. The 'trigger price' set means that you can sit back and sip pina colada while your stock position works itself out.

What the automatic stop loss trigger looks like.

With some luck, your 8.5 sen per share position may never go to 8. It might serenely go to 10 or whatever.

Unfortunately, both methods can be problematic to implement. 

8.5 sen with an 8 sen stop loss limit? Urgh! Any time that point can be hit. The 0.5 sen increments are side by side, after all.

What if the stock hits 8 sen once (let's say some market fool decided to sell one measly lot of 100 shares at that price) but immediately rallies to 10 sen thereafter, you've just lost out on fat profits. Indeed, if this actually happens and you commit to sell your entire position at 8 sen, you will be taken out completely.

Granted, you may also opt to do partial stop loss orders - for example only half of your position committed to be taken out - but this can be an overcomplication of a simple concept.

Stop losses in theory should be inviolable, otherwise you will end up readjusting your reward to risk ratio in real time ("Oh, it just dropped to 7.5 sen for an 11% loss, now I must aim for 22% gain!"). Dilly dallying doesn't work, sister.

We will propose a smarter solution to this serious problem. This issue tends to manifest itself in volatile trading instruments, especially Hang Seng warrants. So we will use a real-life profitable example on how we utilised our stop loss management tactic to great effect.

THE TRADE



To solve the problem of managing stop loss limits for cheap warrants, we will use a recent trade. This is a bread-and-butter case for us. Rather than the profits - we achieved those - the more interesting part is how we managed the stop loss points.

The warrant we're buying is HSI-C7D, a cheap call warrant linked to the Hang Seng. This was a ride-the-wave trade. The backstory is simple : Ms Carrie Lam (pictured somewhere in this article), Chief Executive of Hong Kong, announced the government's proposed withdrawal of the much criticised extradition bill. It is one of the five key demands by protesters - and the only one that is feasible to address - and signifies the authorities' commitment towards resolving the unrest in Hong Kong currently.

While we can argue about the effectiveness of this move, the markets took it seriously. The announcement was made during lunchtime; as soon as the Hang Seng reopened for trading, the index was up 3.3%. That's a massive one-day move of historic proportions, if you must know.

 We are truly living in the worst alternate universe. Source.

This meant that we had to consider a trading angle. Our thesis is anchored on one set of belief above all else: "markets just went up 3%? Good chance it can hit 4%".

This wasn't a lucky guess. It's a calculated move in the context of the news (bill withdrawal) and the market reaction (huge). In other words, we didn't think the markets will immediately reverse course from 3% to 2%. The move was so historic and so outside the normal average that we decided to consider further upside. 

While we look at many HSI warrants, HSI-C7D was attractive simply due to its price point, and its capacity to deliver outsized profits within a short time frame. In other words, it has the potential to gain one sen, with the acceptable loss risk of half a sen. Classic 2:1 reward risk ratio.

So we ended up assuming a position at 8.5 sen. This was not easy as this price was the intraday high when we got into it. Indeed, call warrants gapped up by 2:30PM (the Hang Seng was merely up by 1% before markets closed for lunchtime, and before Ms Lam's announcement).

THE PROBLEM

We're now back to the original issue of managing the stop loss of our call warrant position at 8.5 sen.

We definitely did not want to automate a sell order at 8 sen. Once somebody hits that, we'd get taken out. But our stop loss point actually is 8 sen. We have to do this manually.

Call warrants on Bursa Malaysia are priced differently. Some can be 10 sen per warrant, others can be as high as RM1. They also vary in terms of liquidity and volatility; these are our primary considerations when choosing an index warrant to trade.

HSI-C7D simply lets us buy a lot for cheap. We are comfortable with the sizing. The liquidity and volatility were also acceptable.

Simply put, if the Hang Seng goes all the way to a 4% increase in one day - from 3.3%, when we decided to go in - HSI-C7D will most definitely gain one sen. That translates to an 11.76% profits for us, which is aligned to our 10% per trade profit target.

Conversely, a half sen decline (to 8 sen) translates to a loss of 5.8%. So the parameters are clearly set.

What's left is to deal with the volatility. The Hang Seng might fall back temporarily before rebounding. If this happens, HSI-C7D might go down to 8 sen. But we did not want to be forced to move out. What we needed was a more precise tool to measure the weakness or strength in the Hang Seng.

THE SOLUTION



Enter HSI-C7F. This is another call warrant, but it is much more pricey than C7D. It trades around the 40 sen range at the time of the massive market rally.

Recall that index warrants are priced differently.

As a general rule, the more expensive the warrant is, the more sensitive it is to the index movements.

What this means is that C7F is far more attuned to the little moves in the underlying index. We can use it as a benchmark. We still prefer to trade C7D, because it's cheaper.
This is the tactic : we are effectively using C7F not only as a barometer for the index, but also to set our stop loss points. Let us explain.

The chart below shows the 'redline'. That is the stop loss point for C7F; it the call warrant drops to 41 sen, we'd exit C7D (at 8 sen).

When we bought into C7D, C7F was trading at around 42.5 sen. At this point, the Hang Seng was also at its highest point of the day at that time. Because C7F is so finely attuned to the index, little movements will cause the call warrant to fluctuate in price. 

For C7F, there were three 'ticks', or half sen increments, between 41 sen and 42.5 sen. There's enough room for fluctuations without us being kicked out of of our C7D position.

At the time, C7D can only do one of two things; stay at 8.5 or drop to 8. There isn't much nuance; this is why we can't simply set automatic stop loss points for cheap warrants like this.

Aside from the redline, orange line is C7F. Blue is C7D with our entry (first circle) and exit points (second circle) clearly denoted. Below is a comparison of the percentage changes between the two call warrants.



We had only been talking about managing stop losses. The next technique is to actually use C7F's movement to our advantage. While 42.5 sen was the point where we went into C7D at 8 sen, we can also now manage our position as the market goes up.

For example, when C7F went up to 44.5, you can bet your bottom that we are sitting comfortably. But even at this point, C7D hasn't moved one iota. The Hang Seng actually needs to move in a bigger way - in other words, it needs to hit that 4% one-day increase mark for this trade to work.

Eventually, as the Hang Seng rallied further - it actually peaked at a 4.24% one day increase, or the highest one day move in 8 years - and C7F went all the way to 47.5.

C7D also took care of itself and hit a high of 10 sen. We very graciously exited at our desired 9.5 sen target. Locked in that 11.76% gain.

Below are our entry and exit points for C7D; the two circles are the same as the one in the blue line in the above chart.









Our main point is this : managing stop loss points is never just about the absolute numbers. There are tons of ways to tinker around with the methodology.

(Editor's Note : we honestly can't comprehend how you've read this post all the way to the end).





Sunday, 1 September 2019

TRADE OF THE WEEK #20 - HSI-H6P (HANG SENG INDEX PUT WARRANT)

"Shit, online trading not working bro..." Source.
Outcome
Gross Profits : RM3,000
Return on Investment (ROI) : 11.76%
Duration : 20 minutes


Papa Trump is taking us on a wild ride. Zigs become zags. Clarifications can become clarifications of clarifications. Making lemonade out of lemons is useless now - there's a good chance Trump will piss in it.

50 years from now, our children and their offspring will read this blog post and recall a time when the market seemed to have collectively lost their damned minds. If we are our own worst enemies, Trump is the instigator and propagator of our worst instincts.

His words move markets. He makes us fearful and greedy when it suits him.

Today's trade is about anticipating the extent of such market fears, and how you can capitalise on it to make profits. We made a solid call on market movement (Trump inflicted, of course) and the position delivered. We have been using Trump to make money for a while - he is arguably putting our kids through college.

Anyway! This was a put warrant trade on the Hang Seng index; for the mechanics of put warrants, you can check out our earlier guide.

We managed to profit by using HSI-H6P, a long favoured put warrant that we have previously profited from. The reason for liking it is simple: cheap but not too cheap (it's in the range of 20-30 sen) and fairly liquid. Most other put warrants are either far too cheap (near expiry), far too expensive (and illiquid; we don't like those), or both.

This trade occurred on a Monday : 26 August 2019. We were giddy - with fear - the previous Friday due to a few interesting new developments in the world.

Let's do a bit of news analysis, for a change. Then you will know why this trade is quite straightforward, and more importantly, why the same principles can be applied in future trades.

CHINA STRIKES... TRUMP FREAKS OUT

What was supposed to be a serene week for the markets turned upside down on Friday (23 August) as China made a surgical strike to cut through the B.S. US rhetoric on the trade war. It announced a tariff on US$75 billion of items come September 1, in retaliation to Trump's own imposition of China tariffs.

But China's latest move, which specifically targets US agricultural exports, cuts through a key constituent of Trump supporters. US farmers - who had hoped for better selling prices and are predominantly Republican - stood to hurt the most by China's threat. The reaction in the commodities market was swift, from cotton to soybean. The tariffs simply makes commodity exports to China uncompetitive - and expensive. It's hard to mess with the world's largest consumer of such items.

And what does Trump do? He obfuscates. He claims to certain things happening, knowing full well that the Chinese can't exactly counter every dumb thing he says.

Trump also plays the markets like a fiddle. That's us; we are clearly not more enlightened than this orange blob with yellow haired sprouts on top.


So the market whipsaws, ruining even the most shrewd (?) of index warrant strategies. On 23 August, the S&P500 fell by 2.6%. It was going to be a painful Monday.

We have analysed market fear in length before. Usually the trick is to be contrarian, or go on the offense when everyone is selling. But Hong Kong markets, as always, can be unique. Not only does it bear the brunt of negative moves in China and the global markets, the impact from ongoing protests is a double whammy.

Indeed, since the protests began, Hong Kong has statistically performed worse than China markets, even though their fortunes tend to be intertwined - by this we mean the movement of the Hang Seng Index compared to the Shanghai Composite.



With this divergence in mind, we set about analysing how the Hang Seng will be influenced by US markets' movement on that Friday.

THE TRADE

Rule of thumb : US markets hit hard on Friday? Expect a Monday Massacre.

In essence, since the S&P 500 fell by 2.6%, we expect the Hang Seng to at least fall as much. Then think of the protests; we'd add a bit more losses on top of that.

This may sound like retroactive justification for what eventually happened, but our minds were pre-conditioned to deal with just such an event. This is important to maintain focus during trading hours : especially when the entire world is running for the exits.

On Monday, we knew that Hang Seng futures were pricing in a market fall of at least 2.5%. The actual index only opens for trading at 9:30AM (Malaysia time), but Bursa Malaysia opens at 9:00AM.

That 30-minute period basically allows us to buy index warrants based on the movement of Hang Seng futures. You might know how futures move - either in line, too bullish, or too bearish, compared to the actual index price.

You might be thinking, "2.5% down sounds like a lot right? Can't do contrarian with this one and bet on recovery ah?"

This is where a different skill set is required. Analysing market fear does not mean being contrarian all the time. At opportunistic moments, you can also ride the wave.

This is the skill that enabled us to make so much profits in so little time. Our strength is that we can make up our minds real quickly before pulling the trigger. But we might need to swallow some temporary pain.

This is what happened with HSI-H6P. We bought in at 25.5 sen, essentially the 'gap open' price at 9:00AM. It was a ballsy move; the warrant closed at 17 sen the previous Friday. Big gap.

Futures can be volatile things. Hence, after pricing in the market at a decline of 2.5% earlier, suddenly futures prices reversed course. We immediately faced paper losses as HSI-H6P dropped in price. We were convinced that this was a temporary 'false move'. The warrant fell to 23 sen 9:15AM. It was a fairly sweaty 10-minute period.

True to our expectation, put warrant prices rebounded. The market was indeed heading down. And what happens when the market realises the earlier upward move was false? Panic ensues; we figured prices will move in our direction in a big way.

Remember that all these moves are essentially one thing: the market pricing in the opening price of the Hang Seng Index at 9:30AM. When the market did open, it was actually down by 3%; a massive one-day move in any markets anywhere globally. In fact, the the Hang Seng's reaction even underperformed that of US and China markets.


The five-minute charts looked like this. Notice that we swallowed the temporary loss before prices moved back in our favour.




We eventually exited at 28.5 sen, or as soon as our 10% yield target was met. There was no reason to stay in, other than due to greed. We don't do that. 

It's worth noting that the HSI-H6P peaked at 29.5 sen on this day; the put warrant basically went to hell thereafter, and closed the day at 20.5 sen (!!) thanks to another bit of Trumpian theatre.


As always, in the very risky world of index warrants trading:

1) You need to have a well-defined view of the market and a set of expectations. Then your trading actions are dictated by those expectations.

2) You need gumption to execute such trades and but also to withstand temporary losses.

3) Whether in profit or in loss, exit the market on your own terms, always. Don't get greedy.
























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