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Monday, 22 April 2019

TRADE OF THE WEEK #11 : SEDANIA INNOVATOR BHD


There is not much technical explanation on this particular trade - if we were to sum it up, it's purely instinctual. But you have to understand several key things about how the market works. As just about everyone else when they began learning about the stock market, we started from a position of complete naivety and worked our way up.

We were the suckers who bought at the market peak - 30 sen. As we got better, we were the ones who bought at slightly lower prices - let's say 27 sen. The more experienced you are, and the more you understand the behaviour of stocks, you should end up buying at lower and lower points. This was pretty much the case with SEDANIA. 

A little bit of background : there was no background, really. Just some vague news and after-the-fact rationalisations about why Sedania's stock suddenly exploded on 12 April. Until now, we still had no clue why the stock went swiftly up and swiftly lost all of the one-day gains. It seemed to be a random market mania, driven by low liquidity.

 The mania.

We were fortunate to have discovered this rally quickly. There were low sell volumes throughout its ascent from 17.5 sen to 30 sen, and we got in at the 20-21.5 sen range. This is what is known as a natural support point - anything higher than 22 sen and we'd probably be too frightened to jump in.

Despite not having the fundamental backing or any news to support this rally, we understood the stock's behaviour. Having analysed the buy and sell activity - again, nothing to do with fundamental analysis or conventional technical charting principles - we deduced that there was a good likelihood of the stock hitting higher price points. 

Being conservative, we anticipated that the stock would hit 25 sen per share, meaning a return of more than 10% for us within one day. Remember that a rise from 17.5 to 25 sen already constitutes a massive 42% gain; if anything, we were being extra imaginative, and extra cautious.

This little phase of trade analysis and execution happened very, very quickly quickly; the ability to synthesise different sources of information into a trading strategy is a real money-making skill, and we were confident that the rally opportunity is there.

How quickly? We decided on trading the stock within a minute. Then we got in and out of the stock in two minutes. The whole move honestly frightened us - the stock was going nuts, like, really nuts.

To give you an appreciation of how nutty it was - we made an 18% profit in those two minutes by exiting at 24.5 sen. The stock actually went even higher to a shocking 31 sen. We left a lot of profits on the table, as is the case for many of our most successful trades.

But our execution was solid and our profit targets were met; in the long run that's really all that matters. But the lack of liquidity in SEDANIA was such that the stock propelled itself to a one-day gain of 77% - nice work if you can trade like a hero. 

More importantly, we were no longer the latecomers that bought in at 30-31 sen. There were massive volumes changing hands at those levels, and we were sorely tempted to jump back in (it's embedded in the human gene) but chose not to. Most people tend to forget that lack of liquidity is a two-way street; if the stock swiftly goes up, it can go back down harder, and likely faster. Manias are called that for a reason; they don't tend to last long.

Since that day, the stock has practically given up all its gains. This we expected; after that one-day angle, any subsequent attempts to trade tends to be a losing proposition. We were grateful for the profits and moved on. 




Outcome
Gross Profits : RM2,250
Return on Investment (ROI) : 18%
Duration : Intraday (2 minutes)






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