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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









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