Sunday, 6 October 2019

TRADE OF THE WEEK #23 : PRG HOLDINGS BHD (RIDE WAVE + FALLING KNIFE EDITION)





Outcome
Gross Profits : RM6,383
Return on Investment (ROI) : 6%
Duration : 2 days via 2 trades

Rules are great; they are what separates humans from animals. Without rules, a show monkey can day trade and statistically deliver results that are equally comparable to yours.

We obsess over rules. They are crucial in everything that comes with the practice of trading. They tell us when to trade and more importantly, when not to.

Just as important is to follow another bit of folsky wisdom:

"you ain't ever gonna go broke taking profits".

Rules can separate the diligent trader from greed-driven temptations. They help provide better clarity in thinking, and that's the most important asset you can possess in this business. Many blogs and guides - including this one - talk about rules when it comes to managing losses. This time, we will talk about managing profits, which is a difficult piece of skill in itself.

We say difficult because it applies to ourselves, and we are not immune to the vagaries of greed. Instead of being content with 10% profits, that primal, Neanderthal, dumbass part of our brains tells us to go for broke and target 20% profits instead. What eventually happened was that we lost everything and ended up with a 10% loss - and that was just one real life example!

Greed creates indecision, but rules help extinguish greed. Know these two maxims and you're (almost) set for life.

Today's trade contains two parts that utilise completely different skill sets. The first is momentum trading, and the second is downside volatility trading. Over the span of 24 hours, we did both to great effect, and we will demonstrate how theories behind both approaches can be applied in a real life trading context.

WHEN TO TAKE PROFITS?

If we were to summarise this into a neat all-inclusive formula, it would be this:

profit target met (A) + peak bullish condition in the stock (B) = take profits. Go home. Sleep.

(A) is the part where your rule-setting exorcises all those greedy demons. It must be absolute, inviolable, and... chaste. You must write it all down before it happens, otherwise you won't know what rule to follow, comprende?

What you need is a series of predetermined targets. You can use ours; we keep them very simple.

(Editor's Note : your targets should apply to you alone. Adjust things like profit targets based on your skill level and you amount of capital. It's not realistic to expect thousands of RM in profits if your capital base is RM5,000 or below. Be honest, and adjust these targets upwards when you become a better trader).

1) Profit target per trade, absolute number : RM1,000

2) Profit target per trade, yield % : 5-10%

3) Consider an exit when threshold(s) are hit: 
- 1st threshold : profits hit RM5,000
- 2nd threshold : profits hit RM10,000

4) Get out at all costs if:
- yields hit 30%

From (1) to (4), our range is between RM1,000 to RM10,000 in profits or between 5% to 30% in yields. Depending on market conditions, or how the stock is performing, we may decide to stay or sell. 

Obviously the intention is to maximise profits as much as possible, but those thresholds keep us grounded. When we hit them, an internal alarm automatically sounds. Think of Thumbelina on your shoulder, but this time it's a pot-bellied uncle who's also a master trader.

"Bro, this point hit already bro. Take that money and run. Don't be greedy."

Our first trade in PRG shows we applied this thinking. Following the rules saved our skin, and then some.

ROUND 1

We encountered a riddle right at the beginning : how on bloody godforsaken Earth can you trade a stock that looks like this?

PRG, August to September


That's a daily chart. It's ridiculous. There's not much else to add. So can buy or not?

'Can buy' is the answer, but this is a very risky and dangerous situation. It's a stock that had gained 100% in 14 trading days. Suspension of disbelief is necessary.

The 'buy and close one eye' brigade will say that no skill is necessary to approach this trade. You can sort of just buy and see what happens. 50% of the time it might work, but this also includes the probability of you losing 50% of your capital if you're not careful.

No, what this trade needed was a specialised and calculated approach. We did indeed buy shares at the top of this price activity. And it went even higher.

We'll explain our approach step by step. 

We first got into PRG on 24 September. The stock closed at RM1.08 the day before but it opened at RM1.10. This nice little 'gap up' was the first good sign.

There were two things working in the stock's favour, in our view.

- there wasn't much resistance or outsized selling at the RM1 point. PRG blazed a path right through it on 23 September. We liked that.

- on the morning of the 24th, there was curiously little resistance at the RM1.10 level too. In fact, it strengthened some more. We hearted that <3

To begin with, we entered into a position and set a very tight stop loss point. We were wary, not worried. Either this thing works or it doesn't work, but quickly.


We were only willing to risk a 2 sen loss per share with this move. We were fully aware of the risks of buying at the top. The RM1.18 target was a lofty one, considering where the stock is trading at in the charts.

There were some minor selling activity at higher levels but eventually the stock ended the morning session at a new high. We were holding on to our position.

As we anticipated at the time:


To cut a short story shorter, the stock eventually rallied some more in the afternoon. We were committed to hold the position at least until the end of the day. Our initial target of RM1.18 had already been met; we didn't mind pushing this further.

As at 4PM:



And then, by 4:40PM:

We decided to exit even though the stock closed at its highest point of the day - chartists would consider this the bullish-ish-ness sign of all. Such price activity tends to lead to higher prices tomorrow, or a 'gap up'.

But having met our targets, we knew to count our blessings! We did not give a damn about gap up potentials or what your neighbourhood chartists say. Taking profits is far more important.

We outlined the risks much earlier; just minutes after we entered into the PRG position, in fact. Upon hindsight, it was an ominous warning of what's to come, as you will see...


Included the timestamp so you know exactly when we came up with this.

All things considered, the returns were anomalous in a good way. Not every day does this happen. 


ROUND 2

On 25 September, the stock did pretty much what most of us expected. It opened at a 'gap up', eventually rising to RM1.30 in the morning session.

We admit; we were slightly kicking ourselves for selling a bit early. But then we reminded ourselves that we don't have superpowers. There was no spider bite that suddenly gave us the ability to time peaks in stocks. Selling at RM1.22 instead of RM1.30; so what? 

We didn't have a spider sense to tingle us. But we did smell something funky. 

Over the two days, instead of being an illiquid counter (or a 'lousy stock to trade' as we'd usually call it), PRG suddenly encountered massive buying volumes queued at lower prices. We're talking about thousands of lots, which can be interpreted as a ready supply of buyers.

But the presence of buyers does not necessarily mean actual buying interest. Like Fat Joe on a boat, they can simply disappear when no one's looking. 

On this particular day, PRG peaked at RM1.30 and showed some stability at the RM1.27 level. Within minutes, all hell was about to break loose.

In a five-minute period from 10:15AM onwards, all the purported buyers disappeared. The support at lower prices - those big lots we mentioned - became no more than a mirage. And of course at this time there were a few opportunistic uncles and aunties who were chasing the rising stock. This was a rollercoaster - but it had stopped going up.

So we watched with curiosity as the stock staged a dramatic drop from RM1.27 all the way to 96.5 sen. How do we convey the magnitude of this move - 24% drop in 5 minutes! - other than with  facepalm and shrug emojis?

What the...

Look, this kind of thing does not faze us. We have seen this before - we knew that it could happen, and this time it did with a vengeance. In fact, if there's one thing that haunts as at night from trading - we usually sleep soundly - it's this very situation.

Those who had 2,000 lots of PRG at 1.27 for example, would be deader than dead when the stock immediately falls like this. The only recourse is to dump at any price, and we were willing takers.

Call us whatever you like : predators, bottom feeders, etc. We like to think of ourselves as the bringer of balance to the Force. Our small participation creates a little bit of liquidity for sellers to go into cash, mitigating potential further losses.

Our purchase records below clearly show that we had an idea to buy at the peak (trough?) of the panic phase. We even somehow got a bit at the absolute low of 96.5 sen for PRG. Remember that this stock was trading at RM1.30 barely an hour earlier.

The accumulation and exit phase did not last much longer than seven minutes. Realising that our targets were met. We chose to exit at RM1.10.



The full narrative as described in our members only Telegram channel:


Our final gross receipts weren't bad:




Well, we got our happy endings and whatnot. But the stock didn't peak at the point of our exit. It went up to RM1.27!


The 25 September stock price chart is a thing of beauty. 


The stock market can be extra crazy than usual sometimes. We try to do our part by tracking inefficiencies and pounce on them. But the most important thing to remember is; don't push your luck.


Accept the profits. Go to sleep.





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