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 MARKET REPORTS |
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Resident trader
Good returns still possible
Will Kraa, April 2, 2007
Currently in a market lacking direction trading CFDs is not easy. I'm certainly not doing much of it and others I've spoken to have decided to give up completely for the time being. It is of course possible to do day trading but for those who are not experienced and equipped to do this it is not recommended. When I say 'equipped' I am not simply referring to technology and method but also to the ability to be disciplined and to take losses as required.
Even in the current conditions there are still occasions when the strategy of trading small companies which suddenly jump up in price and volume (after some exciting news comes along) is profitable.
Fewer of these trades are available at the present but the returns can still be quite good. This strategy is explained in more detail in my article Trading price and volume breakouts on microcap stocks.
It's generally considered that trading by news is impossible. By the time the news is released every trader is able to access it and it is thought that it will be factored into the price in very short time.
For the better known stocks this is usually true but for these small stocks prices continue to advance for some time after the news is posted as more people become aware of what is going on.
Whatever the reason for this may be, there are profits I can make from this method and at present that is very welcome.
One such trade I did last week made an excellent return. After I downloaded the intraday ASX data snapshot and did my usual scan (in AmiBroker this is done by clicking the 'Explore' button in the window below) the results were as follows:
The scan shown above was done today for 17/03/08 and so is based on the end of day data for that day. The intraday scan done at the time would have looked somewhat different. I looked at the charts of each stock listed by clicking on the line giving the results for the stock. This is a very useful feature of AmiBroker and makes it very easy to inspect the charts. The one that I found of interest was KEY (Key Petroleum) and the news report on webIress was that they had a 20% interest in a well that had just struck oil and gas.
Notice also that the price increase was 79% and the turnover increase was 1020% for the day, certainly very significant. The trading turnover for the day was also over $800,000 which was enough for me to take a modest position.
By the time I did the scan, looked at the news and decided to take the trade the stock was trading at 12 cents. To set my initial stop I considered the possibility that the market might subsequently decide that the news was not very significant for the stock and could drive the price down again to the previous range of around 8 cents, a fall of 4 cents per share. That was the risk I was taking per share. The amount I was willing to risk for the trade in this account was $1200 and this meant I could buy 30,000 shares. This trade size was also in keeping with the account size and there was enough liquidity in the market of this stock to make this a suitable trade.
I was able to buy the 30,000 shares at $0.12 so the cost was $3600 and including brokerage of $33 this made a total outlay of $3633. Notice that in proportion to the size of the trade the cost of the (minimum) brokerage of $33 was quite high and meant I would have to make a 2% return on the trade just to break even (taking into account the exit brokerage as well). For ordinary trades this is too high and means brokerage could make the trading unprofitable. However with these trades profits are usually high enough to make it worth doing.
As shown on the chart below the price went up for the day after I bought but retraced and finished at my buying price. (Prices on the chart are up to 31/03/08)
The next day the price shot up to 22 cents on even higher volume and the day after went as high as 26 cents but then spent the rest of the day going down.
In January the price had also been as high as 26 cents before dropping to around 8 cents so I knew there were plenty of people out there who had seen their investment drop radically in price and would see this as a great opportunity to get out of what had been a losing trade. There would also be day traders who saw their profits going down and would want to get out to lock in profits.
I also considered that while it was good news for the stock it might not be the sort of thing that would make it a great oil company. I also would be making a profit of more than twice the risk of the trade at that stage. For these reasons I decided to collect my profit and sold at $0.215. The proceeds of the sale was $6,450 less brokerage to net $6,417 for a profit of $2784. This meant I was making a clear profit of 77% in just two days.
As the chart shows by the end of March the price had gone mostly sideways with high volatility and settled at 17 cents. I will be watching for further developments. So far the well has been made ready for production and continues to show promise but the drilling rig is moving away so it may be some time before there are more discoveries.
I have other trades based on this strategy, which are currently still open, so I cannot at this stage write about them. Usually the trade takes more than just two days to develop to its full potential but there is nothing wrong with taking the profit once it has reached a target consistent with your risk management method. If there is a potential for larger profits I will let the trade go on.
Trade Summary:
Risk suitable for this account: $1200 (Less than 3% of the account size)
Entry price $0.12 and initial stop price $0.08 making a risk per share of $0.04.
Number of shares to buy $1200 divided by $0.04 = 30,000.
Initial cost of trade 30,000 x $0.12 = $3600 + brokerage $33 = $3633.
Proceeds from sale 30,000 x $0.215 = $6450 – brokerage $33 = $6417.
Net profit $6417 - $3633 = $2784.
$2784/$3633 x 100 = 76.6%
Exit strategy:
1. Recent large drop in price – people anxious to get out.
2. News good but not outstanding.
3. Previous high early 2008 at 26 cents could provide resistance to higher moves in price.
4. In view of the above I was not expecting an extended large move and set my profit target at twice the initial $1200 risk for the trade. Once profit target of $2400 had been exceeded I would lock in the profit on signs of price weakness.
Hint for AmiBroker users:
After downloading intraday data snapshots, there is no need to close the program to refresh the charts. Just go File>ASX-PremiumData (or whatever data file you have just updated depending where you get your data from) and after a few seconds the data will be updated in your charts.
More articles from this edition of CompareShares:
Broker watch: Broker picks in the soft commodities sector
Fundamentals: An easy Excel spreadsheet method to measure the success of your porfolio
Resident Trader: Good returns still possible
Analysis: Stock to watch in global resources that's buoyed by good news
Analysis: In this climate be careful of what shares you buy
Expert Panel (forex): Hedging your portfolio against currency risk
Expert Panel (shares): What is the smallest and largest number of shares that you can buy?
Companies: Small firms weather Opes Prime fallout
Economics: Labour costs up significantly
Companies: Unclear if Opes clients will see money
Whatever your views, you can discuss this article - or any of Will's articles - on our message board Your 2 Cents.
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