Sunday, 25 August 2019

WE WENT DAY TRADING 'LIKE A PRO' FOR TWO MONTHS : HERE ARE THE RESULTS

This man is just 24 years old. Then he went into day trading. Source

We are not trading pros. Neither are most people, unless if they can actually sustain a lifestyle through pure profits generated from trading activities.
But the dream lives on. We crave for those stereotypes of easy living that come from being a 'pro' trader. Financial independence, working from home, work all day and party all night, underpants as work attire, and all those things...

Wrong! We can tell you that trading is a slog. So many things to work on; tedious bookkeeping, back office functions, dealing with bad calls and losses, yelling at brokers, etc. Trading is about as sexy as pictures of former prime ministers on motorcycles: not very.

 Don't take our word for it..

If you really to want to day trade full time, not only do you have to commit completely, you will also need to be strong, mentally and physically. But if you have the skills and the passion, it won't feel like work. The money can be good too, but it shouldn't be your primary consideration for trading. 

You might think we are full time traders. The answer is naw: we still need to make ends meet to feed the wife, husband, kids, and cats. Here's a reality check : if it's easy to live as a full time day trader, you'd probably see real famous traders out there.

But how about those who are subpar, or just merely good enough? They end up becoming full time trainers and gurus! You will see their wares and services on your Facebook ads. You know, the ones where they put their butts on someone else's cars for some reason.

After all, the easy money is made from the wallets of other people, not via profits derived from the market. The 'get rich quick part' is reserved for the trainers, not the customers.

Trading & investment guru starter pack. Link.

We think we have the passion and the skills (Editor's Note : possibly delusional), so we decided to go into full time day trading temporarily. The results will shock and possibly disgust you.

This year, we managed to find a two-month window to fully dedicate ourselves to trading Bursa Malaysia counters, full time. No other work, no frills, no forex, no other markets; just boring old stocks and warrants. We will share our trading performance over those two months.

From our experiences, we will also share what we did right and what we did horribly wrong. There were periods of sublime trading followed by subpar gambling. There were triumphs and collapses. There were giddy highs and irregular bowel movements. Perhaps this case study will help you decide if you still want to pursue the full time trading route.

We omitted the names of the stocks traded as we consider them valuable and sensitive info; we have gone into these names multiple times during those two months. You might even find them in our TradeOfTheWeek entries.

On the other hand, you will see exactly how much we made and lost. [Editor's Note : we only disclose active trades and the names of the counters to subscribers of our Telegram Group ;) ].

Strategies employed for these trades are the same as the ones you can freely find throughout this blog. No secret sauce there; perhaps you can copy our approaches and do better than us.
 
We are not pros. But we are diligent, and we can be aggressive traders if the situation demands it. 

MONTH X

Not trying to be cheeky, but we also omitted the months in which we went headfirst into the hot tar pit that is full time day trading. We will drop some hints here and there just to irritate you.

Each line in the chart below represents a trade and its outcome. There are gaps in between some of the lines; these were trades in which we 'broke even' (stocks/warrants that were bought and sold at the same price; our only costs were the brokerage fees). The Y axis are the profits/loss, represented in thousand-ringgit increments.

Ideally, we want to see more lines in positive territory (duh!). But losses come about as often as profits; the trick is to minimise downside while optimising the upside. We ended month X well within positive territory. Indeed, it was among our best months this year. (Editor's Note: if all our months look like this, we'd have been able to bid adieu to our day jobs. But...)


Notice a few important things here:

1) The two 'outliers'; these were the really big profits. These opportunities are rare. On average a single big opportunity is found each month.

2) The winning and losing streaks. You can see that we do a lot of 'testing'... small trades exited at small losses when we are proved wrong. Either we were too early, too big in sizing, or too wrong.

3) The big loss at the end of the month. We will explain this in a bit.

Our two big successes come from:

- a sudden and exceptional blue chip stock rally where we capitalised early by trading big.
- a new listing with continuous momentum. We hopped in and out until the stock peaked - this all happened in the span of two weeks.

In principle, we could just target these two types of trades : exceptional blue chip rallies and positive momentum listings. But bro, markets don't throw up these kinds of opportunities often.

To sustain our business, small trades are necessary to 'pay the bills'. These are the little RM500 or RM800 in profits that eventually builds up if there were enough profitable trades done. Sometimes we trade small to satisfy that trading urge. Other times we had to trade just to offset paper losses in our longer term core holdings.




In a really great month, our success is down to 1) our core position gaining strongly in value and (2) our small trades bringing in big profits. The one above is one of the great months.

But obviously this is not an easy business. Our first six trades of Month X (one win, three losses, two break even) yielded exactly -RM5,594. And this was supposed to be a good month!

Nonetheless, our seventh trade brought us into positive territory. we managed to support this capital position with a few good small trades until we managed to hit an even larger jackpot later that month. Forgive the gambling terms, but we wouldn't call a pot of gold by any other name.

Going through a single month of solid, full time trading is not easy. It is positively punishing. Our trades during this month were mostly momentum plays consisting of new up-and-coming counters that have regained footing somehow.

We are sector agnostic, so we had exposures in oil and gas, tech, construction, property, you name it. Such an active trading strategy is only applicable when the broader market is positive. It was at the time, nowadays it isn't.

Unfortunately, with great rewards come great risk. At the end of Month X, we managed to collapse spectacularly in a single trade that almost ruined us.

We took it in stride and analysed the loss. The causes are as predictable as it were obvious.

1) Sizing too big
2) Speculative
3) Loss limits were not strictly followed
4) 'Hopeful' and 'revenge' trading - we also like to call it 'desperation driven gambling'
5) Bought at peak
6) Fatigue

What happened was a very human failing, and one of the main dangers of discretionary trading: not following our own set of very rigid rules to manage risk.

The reality is this : if you follow your disciplined trading rules in 29 days out of 30, the one day in which you didn't could kill you. We took this lesson to heart, even though this isn't really the first time we have made such a mistake.

The market first giveth; the market taketh away.


WHY DO CHARTS??

Charting every trade, every movement, every P&L, is a useful, profitable, and cathartic process. The point about these charts is that they immediately give you perspective.

Maybe you're pushing too hard with too many reckless trades [slow down!].

Maybe you're just too tired to trade all day, every day [just stop and take a couple days off!].

Maybe an obsession with certain counters are destroying your accumulated profits [switch counters/sectors!].

Maybe you're becoming too trigger-shy, exiting temporarily losing trades that prove to be winners after you have exited [take a chill pill & go binge watch a guilty pleasure teen drama on Netflix!].




In trading, this is the one piece of conventional wisdom that we agree with : when going through a series of bad trades, trade smaller. The monthly trading chart tells us to do this.

Without some sort of visual guidance to press the point, the trader could remain ignorant. He or she might be in self denial.

Again, perspective is super important. Bless the charts.


MONTH Y


Now this was arguably a better month than Month X, even though our eventual profits were smaller in total. This is primarily because we have a more consistent series of profitable trades, suggesting good judgment (aside from the outlier, six trades yielded at least RM2,000) and a tight control over risk management.

The outlier that yielded us RM9,000 in profits was an outlier opportunity : it was a newly issued warrant that somehow collapsed in price beyond all reason. We got in at the bottom and won big. Funnily enough, we got into repeat trades (in the same counter) and lost part of these gains, eventually we only kept half of that figure. The biggest loss for this month was the very same counter!

What did we learn from this? It's simply to avoid repeat trades as much as we can. And to be grateful of outlier opportunities.

Despite the extremities, we managed to trade a few thematics consistently. Tech was a favourite sector that month due to intensifying market speculation about the participation of companies bidding for a big project. There was even a little oil and gas play that we somehow managed to profit from - it's one of our worst sectors in terms of personal trading experience.

Overall, Month Y's net profits were considerably larger than Month X. It simply means:

- we kept more of the profits.
- we avoided the losses better.

Comparatively speaking, we had shown a month-on-month improvement as traders.

And then at the end of each month, we'd do a little review session. Call it therapy; Feel free to use the following for your own trading. These comments are either true wisdom or falsehoods. Each month brings new challenges.


We are not pros, but maybe check back with us in 5 years?




Sunday, 18 August 2019

HOW HARD CAN IT BE TO TRADE INDEX WARRANTS ON BURSA MALAYSIA?






Imagine that you live on a small island. As a chicken farmer,  you work at the island's only marketplace. Poultry farming has not been industrialised yet - no Leong Hups or Teo Sengs around here.
 
This market is abuzz with activity as this island relies on a steady supply of goods delivered from the mainland. These include fruits, bread, motor oil, bicycle tires, etc. There's not much to grow locally; your island's GDP is undoubtedly very lousy. Like Singapore's.

One day the perfect storm hits. Your house is inundated with flood waters. Your pets and chickens have drifted away. The situation is pretty dire : your village chief orders everyone to evacuate the island.

The market ran out of supplies weeks ago; there are definitely no more Amazon gift cards to buy. However, a few daring entrepreneurs from a nearby island saw an opportunity to profit. You arrived at the market to see them selling all these bright, inflatable life boats.


 Your local basketball team  made it out first. Source.

Within a day, your blissful community shows its capitalistic tendencies. Punches were thrown as people scramble to buy these lifeboats. The waters are not receding. 

Somebody suggested an auction system to allow the boats to go to the highest bidder. Suddenly a vibrant market for lifeboats emerged, full of different models and makes quoted at different price points. You ended up trading a whole inventory of different boats on credit; settlement within T+2 days.

In reaction to the rising floodwaters and market demand, these lifeboats' daily price chart looks like this:

 We shall sell ships when the shit hits.

This went on until the storm blows over, at which point boat prices collapsed. With no chickens and a fleet of boats, you end up doing the only thing you can do in this situation: start a boat ride-sharing app.
  
By now you may be asking: what the hell are we on about?

The previously peaceful island is the stock market during stable times.

The products sold at the marketplace are different stocks of public listed companies.

The storm and floodwaters are the occasional market shaking volatility. 

The lifeboats are index linked warrants; the only 'hot item' to trade during stormy times.

And you, the chicken farmer? You're the trader.


NEW LEVELS OF PAIN, BUT HEAVENLY REWARDS 

We do not claim to be the authority of index warrants trading, but we have gone through a lot of trades in different market conditions. We have tried to catch the waves and catch falling knives. We have even outlined our strategy for modest but hardly earth-shaking gains.

We regularly trade index warrants linked to the Hang Seng Index. In more vibrant times (Najib times), we had a lot of interest in FBM KLCI warrants too. Those days are over.

Here's a one-sentence crash course on these warrants: call warrants go up when the index goes up. Put warrants go up when the index goes down. If you can anticipate what the index is going to do next, or at least react to what it has been doing, you will be rich.

So why bother trading index warrants? The short answers are:

1) Put warrants are the best way to profit from your bearish market views.

2) During volatile markets (negative times mostly), weak action in Bursa Malaysia stocks mean that trading interest gravitate towards call and put warrants. Bursa Malaysia offers a lot of these, and they have created quite a buzz. There is not much else to trade anyway; so everyone goes to where the action is.

2) They move up and down fast. Assuming you can manage downside risk properly, one-day yields of 10-15% are possible. Let's also assume that 90% of us probably cannot manage downside risk properly.

3) In periods of extreme fear or greed, index warrants may end up cheaper than they should be. Sentiment tends to overshoot real valuation. You can definitely make money by buying the warrants during this time. When sentiment returns (and so do prices), you can be rich.

 THE PROS (WE MEAN THE BENEFITS; WE ARE NOT PROS)

Here's a sample of our successful index warrant trades. We chose to include two Hang Seng warrants (one call, one put) and two KLCI warrants (same).

These show that we have somehow managed to make money in good times and bad times for the two indices. We may well be talking cock, but we are doing so with some degree of authority on the subject matter. 



This post is not about strategy, skills required to trade index warrants, or trading parameters. We have covered those elsewhere on this blog in detail. Instead, we'd like to talk about what it takes, and what it will cost you.

You will either get excited or get disgusted about index warrants by the end. We are sort of inadvertently trying to show you if you should trade index warrants at all.

Again : how hard can it be? 



THE CONS ("OMG, THERE ARE SO MANY")

Let's put aside the very real and very significant risk of severe financial losses for a moment. That's the most obvious 'con'. You know this.

For us, the real impact caused by trading index warrants - particularly those of the Hang Seng variety - are the mental and emotional tolls. 

Because the cyclical nature of Asia markets and how they impact US markets, and vice versa, you will not be able to switch off, daytime and nighttime. This becomes especially bad when you intend to hold certain positions overnight or over several days to let the market move in your expected (profitable) direction.

While we have advocated that you should not hold overnight positions in index warrants, in certain situations we would make an exception. This is because from time to time, markets can get so out of whack that they present extraordinary opportunities for profits. We are talking yields of 15-20% within one or two weeks.

And in this current market climate, that exception holds. We still dabble with the occasional one-day volatility plays, but we have been eyeing much bigger game. 

So usually trades like the one below are OK. We have documented a whole bunch of these.

  
But the overnight trades are unlike these at all; they are different beasts altogether. It's the equivalent of having to stick your head into a crocodile's mouth to reach the treasure inside. You will not have an enjoyable time.

But still, the rewards are real, and they can be extraordinary. You can make RM15,000 profits in two days; these are magnitudes beyond the intraday opportunities we describe above.

However, trading them comes at a cost, which we will count here one by one.

MENTALLY, YOU WILL LOSE IT

When you have a big index warrant position that you so bravely (recklessly?) determined to take overnight, you will be consumed with anxiety. 

For example, say that a super trader (you) has managed to accumulate 500,000 Hang Seng put warrants at 20 sen apiece. In this scenario, a half sen move is a RM2,500 profit. (Editor's Note : this is not us. We are neither super nor have the gumption to put on such a position. However, the following description of the trader's mental state mirrors some of our own past experiences).

Put warrants reflect the trader's belief that Hong Kong's markets - and by extension the US - still have further down to go. The HSI is already down by 10% in August 2019 alone, making it a fall of historic proportions

Imagine yourself doing the following over the course of ten days.

Since Hang Seng's actual index prices are quoted until 4PM, beyond that you will need to look for other clues. 

So, from 4PM onwards, you would look at Hang Seng's futures prices. Every up and down move relative to the Index closing price would be scrutinised.

Then, at nighttime, you'll wait for US markets to open. Does it reflect HK markets earlier, or will it take the lead, thus influencing tomorrow's HK prices? There are only guesses; nobody really knows. 

People may try to deny it, but these days the profitability of our investment portfolio tends to be influenced by a most bizarre market catalyst : Donald J. Trump's big fat mouth. There's even a page dedicated to this: please bookmark it, it's awesome.

 Faces and things that will keep you up at night. Source.

Throughout the night, you will likely end up refreshing your tab to see what the S&P500 Index is priced at currently. Did it react strongly or indifferently to Trump? Did it move due to broader negative sentiment, driven by unrelated events such as the Hong Kong protests or the Argentina stock market collapse? Or does the S&P500 have a life of its own?

Papa Trump can also be your saviour, of course. So you end up hoping for him to say something that will turn the market around. A half assed concession to Chinese trade demand, perhaps. Or a snap decision to save Christmas on behalf of Americans, maybe. Or maybe he will stick to what he does best (worst); a raging tweetstorm at the Federal Reserve, demanding that they save the stock market via further rate cuts (hey, Trump can't do it all alone you know...).

 *shrug emoji*

When you wake up the next morning, you will try to catch up with the night's developments. And since the Hang Seng market only opens at 9:30AM, from 7:00AM onwards you would end up looking at HSI futures prices... 

You have a big position to take care of. Maybe your paper profits are burning through a hole in your imaginary wallet. Maybe you just swallowed a RM10,000 paper loss, and need to swallow another RM10,000 more... and then the markets open.

The combined effect of all this is sensory overload. Your index warrant position rules your life, and you can suffer mentally because of it. You will likely lose sleep over it. You become hopeful and fearful at the same time, all the time. You will wish for a simpler life, perhaps as a chicken farmer.

But here is the worst part : when it comes to trading index warrants, even if conditions mean your position should gain tomorrow, you will be still be anxious. What if S&P500 gains 2% but HSI doesn't the next day? What if your position's value deteriorates despite everything else going in your favour? There will be an endless supply of concerns and worries. No sleep.

This is the ultimate price.

IS IT WORTH IT?

The cause of all these anxieties is very simple: it's what happens when you lose control, but are unwilling to accept it.

The admission that all these factors are beyond your control creates a sense of helplessness. You have a position, sure. You may have been very smart, or lucky, to have gone into the trade at the right time (doesn't matter which). You may also be riding what is a very profitable position.

What you had control over was just the trade. When you take it overnight, everything is beyond your hands. You can create all sorts of trading strategies and try to mitigate losses, but all these can be wiped out by a sudden move in prices.

Forget the philosophical ramifications about pain and suffering. What it really boils down to is this:

Would you go through all this for a chance to make extraordinary profits?

Even for us, we're not sure. We have gone through these phases before, but in small doses. Our profits and losses have not been life changing, but they are enough (the profits, we mean) to keep us going,

But we would never sacrifice a good night's sleep for the sake of profits. Neither should you. 

So don't worry too much about things like HSI futures quotes or Trump. Markets will do what they want to do. High risk means high rewards, but if you let a trade consume your life, it's already a lousy trade to begin with.

How hard is it to trade index warrants? Pretty hard, we'd say.

Are the profits worth the trouble? Yes they are, and as a learning lesson, these trades are fantastic. They will truly let you see the markets and understand how they actually work.

But beware the costs.




















Monday, 12 August 2019

TRADE OF THE WEEK #19 : ONLY WORLD GROUP BHD




Outcome
Gross Profits : RM2,245
Return on Investment (ROI) : 5%
Duration : 5 hours


A series of fortuitous developments created a goldmine opportunity for us. But as is the norm, we were the ones with the short shovels.

We had the right angle. We had the right approach. But we arguably had the wrong trade, and the wrong thinking. In spite of the flaws, we were still able to garner a respectable amount in profits. But errors like this one will gnaw at us like a feral hog.

Let this post serve as a lesson so that you can trade *much* better than us.

THE ANGLE

Only World Group Bhd (OWG) was simply a cheap, more attractive proxy to the Genting Malaysia story. To briefly summarise (long version here), we'll cut down the fat and just share the important bits here. It is as mundane as it sounds.

- Once upon a time, Genting was blessed with a license to use FOX assets for its theme park. There is no FOX theme park anywhere in the world. 

- Disney acquires FOX and subsequently ditched the agreement. Wholesome, halal Disney does not like casinos near its Mickey Mouses (Mickey Mice?) and Snow Whites. Not that these had anything to do with the FOX assets, but still.

- Lawsuits around the world. A billy's worth.

- Settlement reached. So we could earn the privilege to enjoy Deadpool-land or Simpsons-world. We personally would love getting devoured at Alien-land, acidic saliva and all.

A typical scene at one of Genting's run-down hotels/motels/hostels

Where does OWG come in? That's right : your stomachs.
For the most part the group has a lucrative concession (assuming there are theme park attractions to go along with it) to run F&B outlets and some rides in Genting. Close to half of its profits are generated from this. The group also runs a mildly interesting attraction in Penang. 

Now the backstory to the backstory : following a successful listing, the group has suffered a bit in terms of earnings and a bit more in its share price. This is expected; tourist attraction-related earnings can be erratic ("God forbid if the Tourism Minister makes another unfortunate remark!").

The broader picture has not been so promising either. We personally blame it on lousy logos and weak marketing from the Tourism Ministry. Even our famously weak Ringgit didn't bring in more tourists at all over the past two years. 




Something to hurt your eyes with. Source

 So, to put a nutshell in a nutshell:
- OWG was affected by the temporary closure of the outdoor Genting theme park, ostensibly to be upgraded with FOX attractions and whatnot.

- OWG was hurt by the licensing dispute. Genting was hurt more, of course.

- The stock languishes for a while on steady but unimpressive earnings, its true potential diminished for as long as the Genting outdoor theme park remains in limbo.

- With the latest development pointing to an earlier-than-expected theme park opening, coupled with the settlement which would put FOX properties in the theme park, GENM would obviously lead the rally. But OWG could very well be the undervalued, cheaper proxy that can be traded at attractive terms.


THE MISTAKE

If the mother share has been languishing, you must always consider the company warrants too.

Although OWG-WA can't be measured in terms of intrinsic value (the warrant is deeply underwater or out-of-money, in financial parlance), an outsized reaction in OWG should trigger an equally strong reaction in the warrant.

To cut a long story short, OWG-WA delivered higher trading returns than our eventual choice of OWG's own stock. The warrant was also cheaper; thus with the same risk profile, overall returns would have been higher than what we achieved. We're talking about RM8,000 profits instead of RM2,000.

But never mind...

THE TRADE

Proxy trading is usually ineffective. When a sector leader jumps (let's say TOPGLOV), you may want to jump into a stock that is considered a laggard (let's say HARTA), thinking that it represents better value.

But 90% of the time, we would stick with the leader, not the laggard that would be presumed to catch up eventually.

What has gone up may go up further. What has stayed down may be staying down for a reason. Hence, we try not to be cute and prefer to keep it simple.

The only time to consider proxy trades is when you have the following conditions. Note that call warrants can be considered as proxies too.

1) Cheapness - OWG at 60-something sen as opposed to GENM at RM3.90.

2) Attractive liquidity - OWG has low but stable liquidity. GENM is overly liquid as it is a blue chip stock.

3) Chart appeal - not in the K-Pop sense, but more on the state of the stock prior to this market moving news. OWG's shares have languished for a while, as we mentioned earlier. The transition from boring stock to a positive momentum one would no doubt be represented in the stock chart, making it an attractive trading opportunity for buyers in the market.

Remember that there were two pieces of news released on different dates. GENM and OWG had reacted strongly to the earlier theme park opening news. OWG itself jumped from 48 to 56 sen on 24 July 2019. Indeed, if there were insiders, you can bet your Genting casino chips that they have jumped in.

OWG daily chart, 13 May to 25 July 2019.

The second news, announced after market hours on 25 July, came as a surprise to us. But we decided early on that it was enough to send OWG's share price higher. The settlement arguably carries a greater monetary value for theme park operators involved in Genting.

It's better to regain some semblance of status quo, with some FOX properties that can be appropriated as an attraction. Nobody here wants a cetak rompak Disneyland.

We did not have to belabour on that prediction of OWG rising, as prices on the morning of 26 July quickly indicated a major rise. Of course, GENM would enjoy the bulk of the positive sentiment, but OWG arguably stands to benefit as well.

GENM opened the day's trade up 8%. OWG? Up 10%.

By comparing the respective stocks' liquidity profiles, we deduced that:

1) GENM would probably see its shares sold down, simply due to profit taking activity.

2) OWG would not be as badly affected as it has not been liquid enough to force a major fall. Notice that since late May, shareholders would have been able to get the shares at just 52 sen. There would be no rush to take profits.

(1) and (2) had to be right for us to even stand a chance to make money.

Remember, these are all assumptions. We were most definitely biased in thinking of OWG this way, because we are trying to come up with a scenario to build a position on the stock.

Only the stocks' subsequent movements would validate our thinking or completely reject it. But there is an added element of risk here.

It is normal to assume that because OWG closely follows GENM, any negative move in GENM would also bring down OWG's shares. This view can be called 'close association' - since both stocks react to the same news, they should go up and down in tandem, more or less all the time.

As traders, we foresaw profit opportunities only if the above is incorrect. We would build a position in OWG in the event of 'loose association' - that is, if GENM and OWG subsequently start to move independently of one another as the market begins scrutinising OWG's prospects alone. Like former lovers that have now went their separate ways.

Another supporting factor is OWG's weak share price before these developments were announced, indicating potentially larger upside.

As for GENM, whose stock hit a high of RM4 around the open on 26 July, there was a gaping 34 sen hole to fill. We had to wait for the favourable scenario to play out.

 Boom in GENM. Daily chart, 23-26 July.


KICKED OUT, GOT BACK IN

Initially, we set up a small position in OWG to test the waters. Hence we got in at 63.5 sen; a large 13% premium from the previous day's closing. At this time the stock was moving up; it opened at a very good point of 62 sen.

However, we were kicked out by the early volatility. Having set aside a stop loss point of 61.5 sen, we had no choice but to exit. Our sell orders was automated, so it wasn't an issue. The drop from 63 sen to 60.5 sen within minutes points to an unfavourable outcome; a rapid collapse below 60 sen. We took losses of about RM700 from this initial approach.

But then a rebound happened and we re-entered with slightly more confidence. Our position then was eventually catapulted to 70 sen.

Our entry, exit, re-entry and profitable exit points are shown below, clearly denoted with exclamations to demonstrate our enthusiasm about being proven right.

5-minute charts for OWG on the morning of 26 July 2019.

While OWG got stronger as the day progressed, GENM was steadily absorbing the selldown and remained quite weak. We felt that the main difference is the liquidity of the two stocks. Same news, different liquidity profiles, different directions. But OWG's stock had to move for our thinking to be validated.

We got out comfortably at 69.5 sen by following two rules:

1) Exit when our 10% target is reached.

2) Exit when the obvious resistance point is breached, but biased towards a selldown.

For (2), it was simply this: the stock did well enough to hit the 71 sen mark, but the prevailing bias in the market is for the shares to be sold down: it did go up from 56 sen, after all. There was a greater likelihood for a selldown than a bigger move upwards.

Hence we sold at 69.5 sen and did not look back....











Wednesday, 7 August 2019

TRADE OF THE WEEK #18 : PENTAMASTER CORP BHD



 
Outcome
Gross Profits : RM7,700
Return on Investment (ROI) : 22%
Duration : One month



Before we get to the meat of today's story...


 'Memba this?


Let's go back to our post in July, advocating PENTA as a good stock to buy. Let this post be proof once and for all that we do eat our own cooking. Or blow our own trumpet. Or eat what we kill; whichever metaphor works for you.

We began writing about the stock when it was trading at RM3. Now let's do a little revision. This post came out on 7 August, so we have about exactly a month since the earlier post was published on 9 July to do a proper comparison.

The chart for PENTA from 9 July to 7 August looks like this:




That's a 10% return in a month. At its peak, the stock was up by 19%. It was a shame that Trump decided to open his big fat mouth, thus damaging our exposure a bit.

Now here's PENTA-CB's performance over the same period:




Looks cool enough right?

Here are our positions, average price going in and out. Note our 1 sen per warrant profit buffer, as per our guide previously on this.



So,

1) What did we do right?

We followed our own instructions to the letter. We simply created a profit buffer and sat back. We even sacrificed some profits but that's quite alright in this kind of environment.

We can be lazy. We can be tempted by greed. We make dumb trading decisions very often. Our only insight was to force ourselves to stick with our self-devised plan, withstand the natural price fluctuations, learn to swallow sacrificed paper profits, and lived with the balance (Editor's Note : we sold this position after PENTA had already given up more than 30 sen from its recent highs).

The overall return on investment of 22% shows that the yield was out of the ordinary. All things considered, we were quite happy to have the privilege of sitting back and relaxing, as opposed to active day-to-day trading.


2) Why did we sell out?

Simply to acquire cash for short term trading activities... you know how volatile the markets have been this week. We are looking to trade into this theme. We know that we know exactly what to do in the current volatile scenario

Peace of mind is the real power of this long term call warrant strategy. Again, the key ingredients are apparent for all to see:

- Great stock. Solid fundamentals. Fairly illiquid - thus it moves faster.
- Strong growth prospects in the company.
- Good call warrant; cheap enough to express our bullish views.
- Warrant was priced at an appropriate point to create that 'natural profit' buffer.
- We also demonstrated the power of newly issued call warrants that came out at a fortuitous time for the alert trader. This made all the difference.

Again : any guesses to where the stock is now?


The key lessons stand. Our point is that there are actually many opportunities like this that will crop up within the year. You can transfer this knowledge to any stock, provided that circumstances are similar. The trick is to find the proper stock that coincidentally, fortunately carries a proper call warrant. It hardly requires deep analysis, but you do have to cover all the bases diligently.

This trade was best expressed in a longer term context. Not everything can be intraday. Not everything can be contra. To achieve 20% plus yields, you have to buy and hold - most of the time, anyway. 

Note : while we only had the guts to hold for a month (and thus are susceptible to making convenient excuses), we do stand by our opinion that the stock is at least a six months' buy-and-hold, and this trading theme remains expressible in call warrants. We are looking to go back into this at some point, though we will wait until PENTA announces its latest quarterly earnings at the end of this month.

Addendum to Note :

We are terrible at predicting things, but this one from 9 July was our finest moment (possibly):

Donald Trump can eat a brick as far as we are concerned.







Sunday, 4 August 2019

TRADING AROUND THE RUMOURS : HEITECH PADU & SCICOM



Immigration makes money off of you. Have you ever made money off of Immigration? We did. Source.


Bloody hell, do we hate rumours.

Market rumours. Onion aunties. Things that do not contribute much to community empowerment or a functioning society. 

In the stock market, rumours are like a virulent strain - they will kill you slowly and surely if you're not cautious.

But hey! Despite all that, rumours can be profitable as a trading strategy. Just not in the way you might think.

If your uncle hears a particularly interesting rumour about a 'sexy sector play' or 'new government contract', please slap some sense into him. Let us explain.

Trading stocks based on a rumour you just heard = death.

Trading stocks based on how you anticipate the market will react to such rumours = profit bonanza.

In other words, don't trade the rumours. Trade around the rumours. 



We can fit this approach nicely into our core Rukun of artificial mispricing. We all know rumours have a way of driving stocks to dumb heights. That's OK - stocks will go wherever the market takes them. But to make a profit and exit before the mania ends; that's a different story altogether.

Let's say a stock gets so aroused by these rumours (it's really your punter uncle who's aroused, but we're trying to keep this post SFW) that it goes all the way to limit up. To make money here is seemingly easy: you just gotta be early, right? Or better yet, be early by being lucky.

Free of charge, we offer to slap some sense into anyone who uses luck as a trading tactic. Instead, what if we say that there's a concrete strategy to trade these kinds of things?

The ingredients are as follows. Let's keep it simple:

1) Analyse the rumour / piece of speculative news.

2) Draw up a set of expectations on how the market reacts to such things. Perhaps from Less Likely to Most Likely. (Editor's Note : for the mathematically minded, utilise probability tables)

3) When the real life trading scenario unfolds, trade based on predetermined strategy and key targets.


Right, so here's the rumour. It's a juicy one. 


And this:

The Edge, 20 July 2019. Go subscribe.

Want to be a reckless, irresponsible trader? Sure, go ahead. But at least do your homework first.

To even stand a chance of successfully trading this angle, you need to already be aware of the usual suspects. Read the news. Look for insights. Pay for them if you must. Money does not just fall from the sky - though they just might, had you already known what the likes of Heitech Padu and Scicom MSC have to do with Immigration.

Basically it's all here:


That piece of news was more than a month back. That's the thing about contracts-based rumours. They persist, and if these stocks suddenly rally to new highs, you would think that some real news was imminent (ha!).

An adventurous fund manager would likely simply acquire the shares of all three companies a month ago and just twiddle their thumbs in the subsequent 36 days. This would have been a hugely successful strategy, actually.

But most of us are like cheap McValue meals : we are small fries.

So are content with speculative trading when the conditions, and prices, suit us. Everyone knows that in the stock market, the expectation of contract wins (and cancellations) are a powerful force. 

Multiply that force exponentially if it's a multi-billion ringgit government linked project. We are fully aware of this, having experienced a lot of fun and nightmarish times, documented here, here, here, and here

But first, let's throw away the rulebook for a while as we introduce the key players and trades in today's blardytale...

CHAPTER 1 : TRADING IRRESPONSIBLY... UP TO A POINT  

19 July 2019 (Friday)

Note that the first two news stories mentioned above were published on 20 July. Like some of you who are reading this, we traded HTPADU on 19 July. We were among the unfortunate breed of traders who, since last year, would hear the name "HTPADU?" and bark "government contract!".


Rumours are dumb, right? Let's take it to another dimension of zaniness : trade the stock even before the rumours come about.

We take the opportunity of this first sentence to admit : yes, we threw caution to the wind with this trade.

Safety planning? None. Being responsible? Nada. Logical thinking, like we have preached about a hundred times? Zit.

We introduce another part of our skill set that is more dark arts than enlightened and empirical: intuitive trading.

The practice is frowned upon, but then again, we frown upon anyone who uses technical charting terms ("honey, you killed me at 'bearish engulfing' "). And yet intuitive trading can be very valuable indeed.

We are discretionary traders at heart. Our approach tends to be grounded in logical thinking, as far as we can commit to it. But there are times when you have to throw the rulebook away. Intuitive trading is also a discretionary act, though it's not one to be taken lightly (Editor's Note : when we do this, we are truly frightened).

We suppose you can also call it as 'getting a feel for the markets'. Intuition does improve with experience; in fact, your decision making process is reliant on it to some extent. Perhaps you can execute a trade slightly faster when you have intuition, and for short term trades it can mean the difference between a huge loss and a huge gain.
This method can show its true usefulness in special situations, such as when a stock becomes highly volatile. We love assigning newfangled terms, so let's call this 'new volatile breakout'.

The intuition that guided us in entering HTPADU was this : price has moved. Go in first - no time to wait. The rumours are bound to follow. 

HTPADU : THE TRADE

We gouge our eyes out when we read about 'head and shoulders', but we are technical traders too; we  look at charts all the time.

What we do is to try to make sense of the stock's day-to-day price moves and trading volume. Stocks tend to strike us as having specific personality traits: they can be Subdued Sam or Volatile Vivian.

In HTPADU's case, it was the latter. The stock experienced a new volatile breakout on 19 July 2019 without rhyme or reason. No matter; evidently not having any news is not a hindrance to the stock doing this:

The real insight here is that you now know we don't use an iPhone.

Thurth-teenh years! To put that into context, this is where it's important to know the backstory from all that reading you were supposed to have done.

Perhaps there's an info leak somewhere. Perhaps the remisiers and syndicates have deployed their big guns. The rumours were already swirling.

Not that we needed proof for all this. Our sole guide is in the prices. When HTPADU breaks RM1 without a sweat and tries for RM1.18 in the same day, we knew something was up. Real or rumours; it did not matter at the time.

Now, you know this thing is worth looking into. If you don't, we offer some reasons:

1) Stock broke RM1, barely looked back.

2) The 13-year high does not hurt.

3) You should really know that the sector is a very 'hot' one, especially when you know what this company does and what the backstory is.

4) Volume suddenly picks up in the afternoon. In fact, a sudden surge propelled it to a point where it could possibly hit limit up. Spoiler Alert : it did.

Here's HTPADU's 5-minute chart in all its glory on Friday, 19 July: 


Notice that the first big surge happened at around 10:35AM. We were keen to go in, but at what point?

Another big thing : see the 'false breakouts'. The stock essentially tried to breach RM1.18 at least four times for the rest of day, each without success. But came the fifth time, and it did. We got our into a position at the fifth time.

To us it was an intuitive decision, but there were clues abound. If you like your charts, notice that from 3:30PM onwards the stock did nothing but go up. All green candles in our self-patented bullish indicator - the 'stepladder pattern'. These were signs of steady and deliberate accumulation activity.

The second trigger for us was the sudden volume surge. By 4PM, interest in the stock did not wane, and in fact it was the complete opposite. We noticed more buyers emerging.

The third trigger was the timing. When an upward surge occurs at the last hour of trading, you can reasonably deduce that there's more of that wherever they came from.

The volatile up-and-down movement for that day mask the traders' true intention: to accumulate a large position in HTPADU's stock. When everybody else catches wind of this, there's no way to go but up. Limit up, to be precise.

We bought into HTPADU at RM1.18 and deliberately rode it to RM1.25; this was in fact our exit point. The stock's limit up point that day was RM1.26. We were not keen to hold the position over the weekend. We have a social life too, you know.

We settled for RM1,400 in profits for 8 minutes' work. That's enough for us to subscribe to The Edge for about seven years. Not a bad deal! (Editor's Note : the article was what gave us conviction to trade this and the other stock which you will soon read about)





CHAPTER 2 : SQUEEZE SOME CENTS OUT OF THOSE RUMOURS, BRO



 Our next guest needs no introduction...

22 July 2019 (Monday) 

We thought long and hard over the weekend about what lies ahead for HTPADU. It was likely that the stock might continue its ascent - it did close at limit up on Friday (RM1.26) with 8,000 lots queued at 'buy', after all. 

What we were hoping to see was a sluggish start on Monday. A decline, followed by a sudden recovery. We had planned to get in somehow.

Surprise, surprise : HTPADU opened four sen lower at RM1.22. It even fell to RM1.18 for about a minute. However, it came and went too fast. Within two minutes, the stock surged to RM1.32 and we missed the boat.

Even worse - from our perspective - is the stock's erratic movements thereafter, usually a byproduct of it being illiquid and from the influx of speculative capital. This was FOMO in full flow.

From RM1.32, not only did HTPADU fall back to RM1.23, it then skyrocketed to RM1.39 within the hour. The stock closed at RM1.28 on this day; you probably get the idea about how volatile this thing was. 

At this point (in the morning), we did not intend to get back on this rickety boat, so we turned our attention elsewhere. We knew not to trade IRIS, another company that was rumoured to be in the running for this mythical Immigration contract. The stock didn't pass our filter due to its excess liquidity. It just wouldn't move up as much.

But we did cast a lusty gaze towards SCICOM, which seemed to fit the bill for a stock poised for a rally. 

The thinking was as simplistic as it was insightful : if HTPADU is up a lot, why not SCICOM? There was no indication that one company over the other would win the contract; if that was the case, it would have been spelled out in the earlier news reports.

As a matter of fact, both SCICOM and IRIS rallied slightly on the morning of 20 July, at the same time that HTPADU was undergoing all the craziness just described. 

So we did what we do best with stocks, instead of people : we court them without the intention to marry. In other words, we cast SCICOM into our little watchlist and waited for some sort of buying activity to happen. 

We observed the stock when it was at 92 sen; it was already up by 3 sen on this day on very low liquidity. We contemplated a small trade that we figured carried a big upside. 

We already had validation that the angle of this story is a juicy one. HTPADU has already showed how strong this rumour driven price move is. We initially did not think anything interesting would happen with SCICOM, but we were proven wrong quickly.

SCICOM : THE TRADE

There's another crucial element that made this trade work successfully. The chart is gooooood. Below is the daily movement for SCICOM from 23 June to 19 July 2019.


Spare us the candlestick charting nonsense and focus on the price moves alone. Check out the green candle on 11 June: notice the peculiarity?

Indeed: 


11 June news report. Again, basically it's all here.

We love proofs of concept. From this you can see that the stock is especially sensitive to this supposed job that it has front runner status on. The price move essentially validated one thing for us: whenever there's even a whiff of the rumoured Immigration contract being announced, SCICOM is poised to move. How big of a move is the main question.

With HTPADU's move on Friday and in the early hours of Monday, this was blindingly obvious to us. It would be apparent to everyone as well soon enough, so the key to profitability here is to move fast into SCICOM, which is what we did. 

Notice that we first observed SCICOM when it was at 92 sen. It has already breached a new high in two months. And then the move from 92 sen to 94 sen quickly happened, almost imperceptibly. 

To our horror/delight, as is the case for the best trades, we struggled to get in. Some orders were not met as the stock simply moved too fast. We were fortunate to get in at between 94 sen and 95.5 sen. This thing was poised for the stratosphere.

The 5-minute chart below on 22 July shows the rocket launch, and our entry point:


Within the next 20 minutes, the market got wise. HTPADU's not the only game in town. The sudden buying interest brought SCICOM all the way to RM1.15, or a four-month high. 

As usual with normally illiquid stocks, they become most liquid at the peak of major rallies. As per our usual cautiousness, we committed to sell into the buying frenzy. We sold off everything between RM1.03 and RM1.07, which is not bad, but the stock obviously headed higher. 

You'd expect us to rue all the missed profits since SCICOM went higher - we gave up on almost RM3,000 in additional profits - but that's really not how trading works. We didn't care if this thing hit limit up like HTPADU; our priority instead was on capital preservation and exiting at a good profit. We dictate our own rules.

By leaning on our 10% profit target, we successfully got out on our own terms. We look like fools by selling at RM1.03 when the stock went to RM1.15, but we look smart and felt cute when SCICOM actually closed the day at 96 sen. The lesson? We don't care about how we look.

Again, putting everything in context: we managed to get RM3,550 in profits in 15 minutes from the SCICOM trade. That counts as RM236 in earnings every single minute. And we got our treasured 10% yield, the only benchmark that shows why this risky trade was worth undertaking.






So the next time you read about multi-billion ringgit government linked projects, remember to do the hard bits. Read up on your shit. Try to understand all the angles and permutations. Figure out a way to get in. Most importantly, figure out a way to make money.

Once you do all that, the trading is really the easiest part. This rumour alone got us five grand.






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