The Glory of Edge

What is an Edge? 

I used to believe that it an edge was the advantage you could develop over other traders.  In other words, the edge necessary to be profitable was likely some highly complicated strategies that the hedge funds might use with various correlations.  But if this was the "edge" then the retail investor stands no chance. 

As I progressed in my development, I came to realize that you do not need to have a complicated strategy, an edge can be developed by understudying your trading setups inside and out and applying them consistently.   While this certainly was closer to being correct, it is a methodology and not really an answer. I've since come to the realization that "edge" is the edge your system has over randomness.  

Fooled By Randomness

If markets are random, there is no edge. Nothing will make you money, not psychology, technical analysis, trading systems, discipline, or expert money managment.  Thus, it becomes imperative to ask whether markets are random or are they non-random.  

Humans are trained to see patterns in data that does not exist. We can find "bull flags" "head & Shoulders" patterns in completely random generated data. Consequently, I do not believe that training yourself in these chart patterns is especially helpful in developing an edge.

Certainly, much of the market action appears to be random. But given that every trade likely has a strategy behind it, can it be said that the market is truly random?  I  picture the market as a school of fish, every individual movement does not appear significant, but some times, the entire school turns in one direction. 

If your the system does not provide more edge than over a random market, then your system is the same same thing as trading a random market.  It is impossible to make money. 

In other words, if we do not understand the market action, or if our system does not know how to trade it, then the signal is no better than random.  

To make money in the market:

1. There must be a non-random pattern
2. the pattern must be recognized
3. The strategy must be executed properly

There is however, certain times when non-random signals appear. The objective is to separate random from non-random movements and to create a trading strategy that allows you to capture the signal. The difficulty is that randomness hides non-randomness  (signals).

Thus, the question we should ask ourselves is how do we develop this edge?  How do we avoid just trading the noise and ensure that we are not only trading legit signals but doing so profitably.  Given that  some of the best traders often have win rates in the mid 50s%, it is not easy to do. 

Some of my observations that I've built my trading strategies around  are that

1. Stocks rests in periods of consolidation

2.  Volatility leads to more volatility

3. A stock that trends into consolidation will often continue the trend after a volatility expansion.

4. If a stock makes massive move on high volume and the pull back is shallow, the next higher move can be very explosive. 

I've turned these observations into strategies and defined them in my playbook. 

My continuation anticipation setup buys strong stocks in periods of consolidation.

My momentum burst setup buys stocks that have consolidated and have shown their first range expansion -- (volatility leads to more volatility. )

My Fishhook setup looks to capitalize on big volume movers that pull back and then resume the move. 

Confidence

My playbook only works because I have confidence in those setups, Ive detailed.  If someone were to show me a set up, it would do me no good until I have researched it and believe in the setups take advantage of a non-random pattern that I can execute properly.  Until that point, the setup is no better than trading random markets... There is no edge.

 For example, I was able to reverse engineer the Powertrigger Setup. But so what?  I don't have confidence in it, so it is no better to me than a random signal. 

What a Pump Looks Like

I've recently taken a short position in OBCI, which has rallied after it paid to be interviewed by CEO LIVE.  OBCI has now issued  more press releases from the interview in a transparent attempt to inflate the company's stock price.  The headline reads:

"Ocean Bio-Chem, Inc. Ceo In Interview Sees Excellent Prospects For 2015"

In the press release, the company's "excellent prospects" are due to the drop in  gas prices . OBCI reasons that  people will use their boats and R.V.'s  more frequently and thus, purchase more of the company's marine cleaning products:

The drop in gasoline prices means that boats and RVs are more affordable to use. We have expanded our sales and marketing departments to take advantage of prospects for 2015

  The company's reasoning is pretty attenuated and certainly not justification to issue a press release-- unless of course you are attempting to drive the stock price up. This appears to be the case after the news comes out, we see the company being bid up: look at that volume.  2 shares. Someone wanted a higher print and was willing to pay $9.34 for that print. 

Market Monitor

One of the tools that is used to get a sense of the market conditions is StockBee's  Market Monitor.  The market monitor seeks to ascertain what phase the market is in by looking at a number of indicators to gauge the health of the market.

Primary indicators:

• Stocks up 4%
• Up to 300 normal buying pressure
• 300-500 high buying pressure
• 500-1000 very high  (beginning of a bullish turn from a bearish phase)
• 1000 extreme buying pressure 
• 300 plus days are common in bear markets as short squeezes

Very High buying pressure

End of year 877 followed by 952 4% moves: over a 9% move on the Russell in 3 days. 

Extreme Buying

1000 extreme buying pressure -- most likely to come during a bear market  -- November 13, 2008    2242!  over an 8.5% day on the russell   

But this move did not stick as it made new lows -- see chart 1. It reversed the next day. 

DOWN:
up to 300 Normal selling pressure
300-500 high selling pressure
500 to 1000 very high selling
1000 plus extreme selling

Its been suggested that bear market rallies after a 1000 -- so a down day of that level would be bullish But is it? Consider 2010 there were a number of 1000 stock down days

5 day Breadth Ratio 
# of stocks up > 4% in last 5 days/#of stocks down > 4% in last 5 days

10- day Breadth Ratio
# of stocks up > 4% in last 10 days/#of stocks down > 4% in last 10 days
When market is in bearish phase first time ratio is  2 plus signals start of a bull move. 
Ratio below .50 signals start of a bearish move after a bull move has been in progress.

 2 plus readings are good for swing trading on long side.
.5 or less readings are good for swing trading on short side.

Number of Stocks Up 25% in a quarter
Market is in bullish phase while the # of stocks up>25% in a quarter is greater than # of stocks down>25% in a quarter.When this number goes below 200 it is extremely bullish. It indicates extreme bearishness. Rallies which start from readings below 200 are extremely powerful. 
EOD readings of below 200 are rare, most of the time 200 readings are reached intra day for few hours or minutes and market rebounds.

So when EOD readings drop to below 500 be on watch out for a reversal of bearish trend.

Number of Stocks down 25% in a quarter

Market is in bullish phase while the # of stocks up>25% in a quarter is greater than # of stocks down>25% in a quarter.
When this number goes below 200 it is bearish. It indicates extreme bullishness.
Readings below 200 are rare and happen only intra day. 
So watch for EOD readings of below 400.
Unlike end of bear market in bull market, markets do not turn immediately after such high readings.

There is a delay of 2 to 6 weeks before real selling might start and a top is formed.

50% in a month
This indicator tells you intermediate term extreme bullish phases and likely pullback/correction points
Readings above 20 are bearish 
They indicate high bullishness and tend to lead to correction.
Market resumes its bullish move once such high readings drop below 10.
Readings of below 3 are bullish.

I've noticed that fishhooks set ups in low priced stocks start working well between 15-25

SD 50

Here my notes on the Stochastic dynamite off a rising 50MA created by CKBergin.

Money never sleeps. SD 50 is a pullback set up from an oversold condition. The  SD50 setup, i.e. stochastics dynamite off a rising 50 day ma after the 14/3 stochastics or CCI drops below 20 and -100 respectively.  

Here are the setup conditions.

1. Market is in a confirmed uptrend,
2. Strong IBD type stock 
3. 50 day ma is moving up, 
4. The 14/3 stochastic or 20 day CCI is below 20 and -100 respectively, 
5.  Price is at a support level either horizontal, gap, Fibonacci or 50 day MA level,  
6. The last price bar is either a higher close than the open (white candle) or a pause day(higher low than the low of the lowest low day in the pullback. and 
7. On the close the stochastic cross over above 20 or the CCI closes above -100. If all conditions are met place an order .05 cents above the high of the prior day with a stop loss .10 cents below the last swing low. 
8.  Look for a change of direction day, which is a close above the high of the lowest day high in the lowest bar of the pullback. 
9. Buy the close or the next day open without waiting for the stochastic to close above 20.
10. Position size should not exceed a risk of more than 1% of trading capital. 

Managing the Trade:

Initial target is 20% so you hold until that happens or your initial stop on close is hit. DO NOT MICROMANAGE THESE TRADES. Let the market take you out. Once 20% target price is hit you now stop out on any close below the low of the last high close bar, but sell any key reversal day. By doing this you can catch some 25% to 30% trades, and at worse your 20% intra day gain might only stop on close at 18%.

 If you get a take off like GPRO with only one day red bars that are ignored the next day ride the sucker and after 50% use a three point point and figure chart reversal the exit. These are the kind of home run trades that can make your year. 

Target

Shoot for 20% gain or you can take off 1/2 at 10% and trail the rest at a three day low stop. In any event sell all reversal days on volume. he high of the of the prior day being exceeded by .05 cents

EXAMPLES:

GPRO.  The low day was 8/8 with a high of 39.18. It traded sideways in a tight narrow range with the 14/3 stochastic going under 20. Although we had no 50 day MA yet the trend was rising as prices were higher than the IPO day. On 8/14 we had a higher close on better volume than the prior day at 38.49 a 3.8% gain and a dollar breakout.

8/14/14:

Observations: Volume increased, Dollar Break out w/3 move

CCI coming off oversold

8/15/14 Trade entered @39.50

RESULT

BABA?

1. Market in an uptrend: Check--but not exactly strong
2. IBD type of stock, Check
3. The 14/3 stochastic or 20 day CCI is below 20 and -100 respectively? CCI below 100
4. Support level, Check Bounced right at 50 MA.  
5. The last price bar is either a higher close than the open (white candle) or a pause day(higher low than the low of the lowest low day in the pullback?  Not fulfilled, High of low day was 107.95 , thus would need to clear above 108 and CCI above 100.

Conclusion: BABA is close to triggering an SD 50 trade but is not fulfilled yet. 

"If You don't know who you are, the market is an expensive place to learn."

I'm taking Adam Grimes' online course. It's free and can be found here.  As an opener, Grimes cites the market adage I have in the title and asks "who are you? 

Who Am I?

In my past reflections and market musings, I've come to the conclusion that trading  is a game we play against ourselves.  It's now time to size up my opponent.

Background

My initial interest to the markets was during the go-go period of 1998-2000. I was in college.  I have a distinct recollection of a 60 Minute episode that portrayed day traders.  The gist of the program was that  people were quitting their jobs in masses to trade the markets and they were making fortunes--except the ones that lost fortunes. I was making $7 bucks an hour and I was hearing about people making 10K in a day. I thought that sounded like the coolest job ever.

 I was still risk adverse and had no plans to day trade.  Nonetheless, I convinced my parents to let me open an investment account at E-trade and I put some of my college funds in the account.  

My First Trades

 Shortly after opening my trade account, I read a Money magazine article about stock picks and Knight Trimark (NITE) was  one of the recommendations as they were a market maker who would make money on every online trade. In addition, I picked Etrade as I figured I would now be using their services so I might as well be an investor. Call it beginner's luck because these trades were absolute home runs. NITE, which I had bought in the 40s would run upwards of $150 and split 4/1.  Etrade made a similar parabolic move. 

Of course, that was not entirely unusual during the period, stocks like AMZN, EBAY, CSCO, JDSU, JNPR were going parabolic.  And then there was QCOM.  One of my college buddies had bought 300 shares when it was a $15 stock.  He was up over a hundred grand, when he told me about it.  I didn't buy but I did buy his next recommendation RMBS.   

I was doing a lot of reading mostly on yahoo messages boards. It was all half-hazard approach but it all worked.  Everything worked back then.  Anyway RMBS looked like it was at support (or at least what I had believed was support) I bought 100 shares at 60.  I would sell it 3 months later for over $200-- (it ran to $470 and split 4/1. )

At that point, I started getting into swing trading.  I came across a guy called "TraderMike." (He now has a site called Wallstreetwindow.)  This was really my first foray into swing trading.  Trader Mike had a free newsletter or email list in which, he would send out a watch list.  These stocks were usually hitting 52week highs. The day after doing so, they would nearly always gap up.  10-50%.  I was making money with this method but I never really understood position sizing or risk management and those types of things.  I had some big winners a $6000 1 day winner in JMAR on a 50% gap up comes to mind.  

Bubbles pop and the internet bubble popped magnificently. All things considered, I came out relatively unscathed.  I gave back some profits, I big losses on a stock called InfoSpace, but I had sizable profits that I had retained.

Tradermike made a call that Gold wold be the next thing...and it would be.  But when gold was still $400 an ounce there were no ETFs.   You had to buy the miners.  While this could have been the trade of the decade, I lost money.  As I look back on it, I had no idea on how to buy a set up. I was constantly shaken out of stocks like NEM, GG, RGLD and became discouraged despite the parabolic rise in gold over the next decade.

CBOE

I was serious about being a trader and coming out of college I landed at an option market maker as a junior trader.  My job responsibilities included placing trades on other exchanges to spread risk for our traders to spread and basically learning how to trade.  I was to go  through an intensive 6 month training program.  Mock trading, option theory, strategy.  After that time, I was to get a badge and begin trading.  It didn't work out that way. 

The market popped in a big way, After 9-11, the market got a huge surge in volatility then the volatility dried up.  When volatility dried up, market maker profits go down.  Everyone on the floor was hemorrhaging money.  The firm was not anxious to put new traders on the floor as it, and every other firm, were firing their existing traders.  It became a very depressing place to work as our mentors were being let go.  I never got my badge and a year after starting the trainee program was discontinued and I was out of a job. 

I became very jaded on trading in general but one good thing about taking the job at the CBOE was that trading in personal accounts was strongly discouraged due to conflicts of interests, etc.   After I was let go, I went on to more schooling.  My trading profits were spent on tuition.  As I worked towards my new career, life got in the way and my trading fell mostly by the wayside.

The Next Chapter--Discouragement 

Most traders go through the discouragement when they first start to trade. I got mine a decade later after I attempted to trade again.  I tried  to keep up on the market and would read seeking alpha articles on various stocks.  I wanted to get back to trading but I had convinced myself that it is now too difficult.  I read about the complexity of the various hedge fund strategies, paired trading, high frequency trading, automated trading and all that good stuff. I was convinced that trading again was beyond my capabilities and it would be a fool's game to try.

In 2011, I placed some long term trades after the market sold off very large.  I bought MO, DIA, JNJ.  I did well, but as I attempted to move towards shorter term strategies my results were not that impressive. I would win on most of my trades but then shit like an elephant when I lost.  I had no concept of proper money management.

Fortunately, I then came across "Step Into My Trading Room" by Alexander Elder. I learned the importance of the 2% rule--- no trade risks more than 2% of your equity and the importance of keeping a trading journal.

I would like to say that everything suddenly made sense and I started following all these rules and became a profitable trader at that point, but that's not what happened. Here's what really happened:

I was initially hindered by positions I had that were not really trading positions.  But I didn't want to simply sell them because I had read a few books.  My trade selection was poor, It was a difficult time in the market and I fared poorly and lost interest. 

In 2013, I took a look at some beaten down stocks that I thought could make comebacks.  I bought NOK and BAC.  Both stocks made come backs over the course of the year but my returns lagged the market badly.  But I made a strong charge at the end of the year. 

It was this move, that revitalized my interest in trading again.  NOK sold out its handset division to MSFT.  I then did a few more profitable swing trades and my account had recovered. 

2014- My Breakout Year?

  I've eventually learned to define my setups, find profitable setups, and make money.  This was not exactly a smooth year. I've had numerous relapses into past bad habits  but I am now confident I can succeed and I've done so:

Self Assessment

Here's where I am at this point in my development as a trader.  It is an honest assessment and a transparent assessment.

Strengths:

• I have defined my setups.
• I have defined my risk tolerance
• No hesitation to take a trade.
• No regret about missing a trade
• Not usually afraid to re-enter a stock at higher prices if the setup warrants 
• I go into a trade with the mainframe how much will I lose.  This frame of mind has allowed me to properly position trades and to avoid hype
• I still have confidence in my setups even after multiple losses in a row.
• I can overcome multiple losses in a row with 1 or 2 profitable trades.
• For the most part, I have been  able to immediately take losses.
• I've been able to consistently find profitable setups. 
• I've made some very good counter-trend trades. 
• I've bought well for the most part.
• I've avoided significant drawdowns. 
• I can research stocks for profitable shorts. 
• Transparency -- 
• My trade journal remains an open book. By keeping it open to the public, I force myself to be accountable. It helps me follow my rules and my setups.  It is also a very helpful tool to see how stocks I've traded in the past acted on past trades.

Weaknesses:

• I occasionally take impulsive trades that do not always fit my set up criteria
• I'm too influenced by trade recommendations of people I respect.
• I take profits too early on many breakout trades.  
• I am uncomfortable when a stock Rips in my favor.
• I am uncomfortable when a breakout buy fades -even if just a small amount so I sell
• On a handful of occasions, I've froze and not taken a loss when I should have and I have broke my 2% rule.
• I've fallen prey to the sirens call of massive profits and have traded too big at times. 
• I've not been able to consistently stay in trends.  I captured only 1 big trend this year.  
• My selling criteria are not as well defined as my buying criteria. 
• I have little conviction in any particular trade.
• I migrated from strategy to strategy a little too haphazardly.

Year Highlights

• I caught a 50%+ trend trade in HCLP

• I developed a setup to trade low price momentum stocks profitably, which has delivered gains over 50% on a few stockss

• I've traded continuation anticipation setups well 
• I have found a trading community that I very much enjoy.
• Having the resolve to recovering from a trade that took 9% of my equity.

Goals

• Catching a superstock / EP early 
• Staying in stocks that are moving in my favor longer
• Gaining conviction in individual trades.
• Fewer mistakes. 

A Darvas Study

Nicholas Darvas was the author of the famous trading book, "How I Made $2,000,000 in the Stock Market. 

The idea was to pick strong stocks, which he wanted to have doubled from their lows.   Darvas drew boxes around those stock charts while they were in consolidation. These boxes are now called Darvas boxes.  The Darvas method works just as well today as it did in his day. It has has attracted a large following. 

Some have suggested that the Darvas method may be summed up as follows: 

D – Direction of the Market
A – Accelerated Earnings and Sales
R – Relative Price Strength (and Return on Equity)
V – Volume Increasing
A – Aggressive Growth Group
S – Sound Base Pattern

 In any event, I wanted to run through what a Darvas stock might look like.  I came across PLNR.

Here's PLNR which got a big move after earnings.  It has now setup as it has formed a nice base after these earnings..  I drew the "Darvas box" around the highs.  But we also want to see earnings growth, a volume surge, and a low cap /  float.   PLNR meets all these requirements in my opinion. 

Studying Fibonacci

A generous trader has been helping me and many others to understand Fibonacci retracements and projections.  Thanks Mr. Soul.  His blog is here: http://rockinfibz.blogspot.com

Following his lead, I thought I would add them to my EXAS chart.  It is interesting that the the initial support comes in at the 61.8 fib of the gap and the secondary support came in right at the 50.   Now I didn't take positions at either.  Rather my buy was the range expansion where the last "N" on the chart appears. 

I became bullish on EXAS after watched the gap hold at the first "N" and then again at the same level--Which I now know was the 50% line.  Now if EXAS takes out the resistance, I'll have some clear skies.  I'm planning on using the 6EMA has my stop here. 

Finding Momentum Stocks Likely to Reverse

People like of the idea of buying low and then watching their stock immediately reverse and head higher.  That of course, rarely happens and people attempting to catch bottoms often watch their stock go much lower.   But let's see if we can turn the odds in our favor with a few tweaks to our framework.

Most significantly,  Let's only look at stocks that are in an uptrend.  I realize that is not the traditional reversal type trading, but I like to make money so I'm going to bet on proven winners. I'm not going for 10 baggers, but rather low risk trades that can add 3-6% to my equity in a few days.

  By way of example, I'm looking looking for something REG. A stock that has taken a rest after a nice run.  Its sold off, but the range has become narrower and eventually it goes green. Any buying pressure should spark a decent run.  Stops can be tight and positions size large to capture the renewed bullish move.

In Telecharts we can do this with the following formula:

avgc7/avgc65>=1.05   I also add a volume requirement to my scans to weed out stocks that are too thin to trade.

The TI65 formula produces a large number of stocks.  I got 845 running it this morning.  I have no interest in running through 845 stocks in addition to the other scans I run.

I wanted to find stocks that have pulled back a bit.  And since I tend to be impatient, I want to find stocks that are ready to resume their move now.

So I  then added another condition to the scan

"c>C1 and C1 < C2 and C2 < c3 and C3 < C4 and C4 <c5"

This provides stocks that are in an established uptrend thorough T165, but have sold off over the past week but have now stabilized and are ready to reverse.  On the maiden voyage for this scan I got the following results:  EXAS, LXFT, BIDU, CTSH, AGTC, BBRY, LBTYA, LBTYK, ABAX, BAH, REG, IDT, ESI, TXRH, MAR, SRCL, STE, TREE.

18 stocks.  Certainly more manageable than 845.  There are several stocks we can weed out right away.  such as LXTF.  This one gets cut because the selling pressure was not contracting so the last up day, is likely to be a relief rally that will be sold.  The bears are still in control:

In contrast EXAS, shows that the bears were exhausted and the bulls are back in control.

I'll probably tweak the formula a bit.  I'll see what happens if I reduce the number of days use an average so a minor up day would not break the formula etc...   But the idea will be the same.

Trading Against Yourself

Pundits are always trying to predict what the market will do. I've come to realize that trading is a game you play against your self more than anything else. Once I came to that realization, this game became a lot simpler. I don't need to predict what others will do, to be successful I need only predict what I will do under certain scenarios.

I know that every trade I put on comes with the baggage of my prior trades.  That is why it is so important in my opinion to develop the procedural memory and trade consistently.

My trade journal is the best weapon I have against my self.  By posting the good, bad, and ugly I cannot deceive myself (or anyone else) into thinking I have it all figured out.  I need only to trade out of my play book and follow my rules and plan for the trade.  When I do that I avoid the self destructive tendencies and thoughts that are the sirens steering many traders to the rocks of ruin.

So what are some of those sirens:

• Fear of missing out on a big winner.

How many times have you been confident in a position and probably put on too much size only to see the trade not working.  So you wait a little longer because this could be the one.  Heck, you've probably counted the dollars you'll make when the stock doubles, triples or more.  It then trades down more and more and you wind up with a big loss.

I've been there. In fact, it was one such trade that caused me to start this blog in 2012.

• Fear of being wrong

How many times have you refused to sell a position for a small loss because you just want to get back to even. So we see if it bounces at a support level, and then the next one, etc...  Even though I know the first loss is the best loss, I still find my self doing that from time to time.  

I very narrowly avoided such a disaster earlier this month.  I was short LAKE at  10.30.  I thought hey, I'll just go in small wait a few days to the hype passes and then put on size when It starts to fade. Thank God I came to my senses during A.H. trading as I watched LAKE tick up.  It tripled  over the next few sessions. 

• Greed /Hubris

These ones always hits me when I'm on a winning streak.  The second I start thinking I can do no wrong,  and the market will come around to my way of thinking.  When I have these thoughts I've probably just bent a rule and am going to get my self in trouble.  

• Regret

I sold XYZ too soon or I should have bought it when I first looked at it. So I'll buy ABC because its the next XYZ.  This siren's call plagues many new traders.  I noticed a lot of the late comers in the EBOLA rally were coming into the later movers with these types of emotions and mindsets. How many people were saying that VRS, APT, IBIO, HEB, and OBCI were going to pull lake like moves and go parabolic.  I was more than happy to sell the dream to the late comers as I got into some of names early and out quickly. 

Regret, in my opinion,  is the easiest sirens for traders to overcome.  You need only realized there is always another trade, there will always be another opportunity,  there is not only one golden ticket.  

Those are the pieces we all have to contend with. Whether we choose to recognize and combat our self-destructive tendencies will have more impact on our success in trading than reading all the market headlines, guru recommendations or earnings transcripts. 

Power Trigger BBRY

Look what I've reverse engineered.--The fabled Power Trigger Setup. So do I spill the beans so everyone can make their own ... or do I make people become my "special followers " before I share the details. Hmm.

"what I learned Losing a Million Dollars" Book Review

Brendon Moynihan by Jim Paul. This was an interesting story about a CME trader that had a good run and then blew out.   

The lessons to be learned include:
1. Internalizing failure will keep you from rebounding.

"When you lose money, people tend to internalize that. They tend to equate self-worth with net worth," Moynihan says, referring to the way that people tend to equate their failures with their identity.

If you lose a massive amount of money or suffer another big setback, you will be holding yourself back from a rebound if you see yourself as a failure rather than someone who failed.

It was this fear of being a failure that kept Paul from aborting his investment in the soybean oil trade, despite multiple indicators of a sharply declining market, Paul and Moynihan write in their book. Looking back, Paul writes, he wishes he would have simply accepted the failure and moved forward before putting himself through even more difficulties.

2. There's a difference between risk-taking and gambling.

Being a smart investor requires taking many risks, and not all of them will result in success. But smart high-risk decisions are still very different from gambles, Moynihan tells Ferriss. Gamblers marry their ego to their money, which is what Paul did.

"They want to be right. It's not about the money. In gamblers, that is a disease... Money is just a ticket to enter. They're there for the adrenaline rush," Moynihan says.

3. Emotional decision-making is dangerous, especially when it's done as a group.

You're a human being. It's natural to have emotional reactions to situations, whether positive or negative. Just make sure you learn how to set feelings aside and look at something objectively before making a decision.

Fishhook Update

 I've had a lot of questions about how I find big gain stocks and trade them with the Fishhook setup.  This post is a follow up on my initial description of this set up

The Fishhook Setup that I described has been performing extremely well.  It has performed much better than the range expansion breakout that I also trade--which has had limited follow through the past few weeks. 

The Fishhook Set up

Lately, I've noticed that there are a lot of stocks making some big moves.  I've been using a fishhook entry on these stocks with a lot of success.  

If only...

"If 'ifs and buts' were candy and nuts we'd all have a merry Christmas." -- Don Meredith


I frequently see people on stocktwits and other message boards making comments along the lines if only I would have bought XYZ stock, or sold ABC stock at such and such price. I too was guilty of such thinking, I can't count the number of times I would think to myself "if only .."

Big Gain Hunting: PIP

PIP has the possibility for making a huge move within the next few weeks. It already had an initial EP August 8, 2014 when the Chancery court of Delaware issued a decision finding that PIP was entitled to damages from SIGA:

 "I conclude that PharmAthene has proven adequately that it is entitled to an award of a lump sum as expectation damages for SIGA‟s breach of contract."

Per the decision, the damges will be submitted by PIP's expert and SIGA is only permitted to challege computational errors and not the availability of such damages. 

The interesting thing is that the Court did not actually specify a damage itemization. PIP's attorneys have to supply that.  Undoubtedly there will be a short briefing schedule which could extend the date into next month.  That being said, PIP is likely to obtain a court decision (and investors will get a press release announcing that PIP has been awarded something in excess of $200,000,000.

That is a tremendous amount of money for PIP, which currently has a market cap of only 127 Million and 14 Million in sales.

Will they collect?  First, in hunting this big gain candidate, I'm not sure that it matters, the announcement should spark the move in itself as the initial decision on the merits of the suit did.

Appeal?  Probably.   Issues of credibility are nearly impossible to overturn, so I would say that SIGA would have an uphill battle unless they can overturn the legal theory of the expectation damages.  I don't think that will be the case since it already came down from the Delaware Supreme Court, which agreed that it was a proper measure of damages.

In addition SIGA should have to put up a supersedas bond to avoid collection.

Collectibility? A concern, but as if SIGA attempts a BK, PIP will be the largest creditor it would likely obtain an exclusive license on the drug and the government contracts that go with it. Notably, in the court decision, the court observed:

"SIGA valued ST-246 conservatively at approximately $1 billion. In mid-to-late 2006, as ST-246 began to look “more and more like a multi-billion dollar drug,” SIGA began experiencing “seller‟s remorse,” which was the primary impetus for its bad faith conduct later."

So the question is what effect does $200 + million  award have on a company with a market cap of 127 Million?  I don't see how its a negative.

Big Gain Hunting: JRJC

Despite my intended vigilance on stocks that make mega moves, I missed JRJC's move this week. JRJC enjoyed a relative period of quiet  activity before exploding this past week;

Weekly

So what happened?


News:  partnering with CITIC to launch a Chinese online trading platform.

Ingredient List
Small Float: 21.79 Million shares.
many China stocks making good moves
Growth: First qtr Earnings from june

2014 First Quarter Financial Summary

• Net revenues were $23.2 million, representing a year-over-year increase of 321% from $5.5 million in the first quarter of 2013;
• Gross profit was $17.8 million, representing a year-over-year increase of 389% from $3.6 million in the first quarter of 2013;
• Net loss attributable to China Finance Online was $2.0 million, compared with a net loss of $4.3 million in the first quarter of 2013.

Current market cap 228 Million.

Analysis

JRJC seemed to have the right news at the right time.  This move was not earnings related.  Interestingly,  the market faded  its earnings as the gap was faded:

Everyone would obviously love to capture moves such as this.  I'm not sure that it was justified however, on the news that sparked the run.  I suspect that JRJC will sell off.  If the news of the trading platform is really the game changer that the market's first reaction seemed to think it is, there will be another opportunity to purcahse JRJC when it's earnings start to realize the potential.  This type of event news driven move presents the toughest type of move to capture.  I would be a seller here.

Book Review: Superstocks by Jesse Stine

Every year, there are stocks that will have epic runs and return 500-1000% or more within a few short months. This book explores how to find these Superstocks and how trade them.   I've been trading for over 14 years. During that period, I have probably read over 100 books on investing/ trading and very few of them are worth a damn.  This book is not is the usual B.S. trading books that show some swing trading setup based on cherry picked charts. This one was different.  This is Jesse's story about his actual trades.  Jesse did it.  This is his book, his story, and our opportunity to share in it.    Superstocks is hands on as it takes you through his trades.  Showing the entries, exits.

If you want the entertaining story about how he did it its in there as is the psychology.  If you want the hands on detail thats there for the taking as well.  This style fits my philosophy in that it is part momentum, part fundamentals, and part trend following. These stocks are set in motion by a major event. Usually earnings.  (Stockbee a site, which I subscribe calls these type of events, episodic pivots or "EPs")  Jesse demonstrates how to get into these stocks, what to look for in the 8ks, the charts and how to get out before they collapse... they always do.

There is also  healthy dose of trading psychology and contrarian advice... turn off the noise, look at weekly charts because everyone looks at daily charts, don't use indicators because everyone uses them.  Think differently, get different results.

The only area where I felt Superstocks does not go far enough is in risk control.  There is not enough much discussion in the way of stops or position sizing. This would have been helpful. However, I get the feeling that Jesse's own trading during his 14,972% run would have violated many traditional notions of risk management due to the leverage he put on his trades.  Indeed, he does not hide the fact that he had some massive drawdowns. 

I love that this book was self-published because it contained many more examples than most publishers would have allowed. In an area where there are so many phonies, it is refreshing to see someone who is genuine as a trader.  After reading Superstocks, I immediately read it again. I'm now on my 3rd round.

Psychology before earnings: PLUG

This post is to assuage my own psychology and record my thoughts right as uncertainty is the highest 

 I've done my homework on PLUG. After doing so, I took a position on the hypothesis that company is early in its growth cycle. Tomorrow that hypothesis will be tested. Very rarely do I have complete confidence in a position and PLUG is no exception.  

We've all seen stocks take off in light of an earnings report. 50% - 70% or even 100%.  Of course, there there are many that go the other way.  Plug has many positive signs:

• Strong Guidance forecast from 1st quarter (top end above consensus 16.7
• BLDP reported heavy sales from PLUG
• CEO's "breakout year" remarks.

Still, after more reflection, I find my way shying away from my Big Gain hypothesis. .

• Number of shares outstanding-- 161  shares  (added 22.6 Million in April's secondary offering)  That's a lot of weight to carry.  

• Excessive Bullishness  --
• 97% BULLISH 
• 3% BEARISH   
Stock-twits unscientific measure.  Could cause sell off even if earnings are great due to expectations. 

• M.O.U. with Hyundai was supposed to be formalized into a J.V. by July 31. 

I'm still bullish, the chart looks fantastic.    I've managed my risk, I've gone through my trade plan.  May I have the discipline to follow it as volatility gets crazy.  Game on.

Waiting is the hardest part.

After spending many years in Wall Street and after making and losing millions of dollars I want to tell you this: It never was my thinking that made the big money for me. It was always my sitting. Got that? My sitting tight! It is no trick at all to be right on the market. You always find lots of early bulls in bull markets and early bears in bear markets. I’ve known many men who were right at exactly the right time, and began buying or selling stocks when prices were at the very level which should show the greatest profit. And their experience invariably matched mine, that is, they made no real money out of it. Men who can both be right and sit tight are uncommon. I found it one of the hardest things to learn. But it is only after a stock operator has firmly grasped this that he can make big money. It is literally true that millions come easier to a trader after he knows how to trade than hundreds did in the days of his ignorance.”

Jesse Livermore  

BIG Gain Hunting: CDXS

As pat of my Big Gain Hunting trading plan, I am working on predicting moves based on information currently available.  As I've had a lot of views on my PLUG writeup, I need to disclose that my The S.O.S. Education blog is for theories, analysis, etc. and S.O.S. is  my trading Journal, which documents my actual trades.

I anticipate that there will be some overlap in positions.  In that if I feature a stock here, I may or may not take a position in it.   I have taken a position in CDXS and for that reason my write-up is here on the S.O.S section :

Big Gain Hunting: PLUG review

1000% moves. They happen. Traders catch them. How can I  catch these type of moves? Here's my training plan.

Training Regime 

• Study the past movers
• Place the earnings on the chart. What did monthly, weekly, and daily charts look like. 
• What was the volume the day before, after , the next day.
• What caused the move?  If earnings read the 10Qs 8ks, Conference calls 
• Compare to the past.
• Identify entry cues
• How do the moves start?
• Where are the best entry points.
• Stops
• Predict Next movers
• Write up case for the big moves
• Identify entries exits and plan to handle if rises
• Trading plan to sell if it doesn't work out 
• Start Hunting 
• Start with smaller positions
• I'm assuming I'll have many false positives and will fall prey to my emotions when a trade goes wildly in my favor 
• Assess trade
• Build confidence
• Trade with confidence
• Capture monster move.

Monthly Chart Observation:

• Very long neglect period of small weekly moves with low volume.
• First week of December sticks out like a sore thumb in range.  (December 5-6)

Prior to that time $6 million shares would be a huge day.  But within two days 37Million and they 69 Million shares traded on back-back-back days.

Why?

Plug rose 61 percent to $1.27 at the close in New York, the most since October 2008.

The bloomberg story reported that "The fuel-cell maker that hasn’t had net income since its 1999 initial public offering, rose the most in more than five years after saying it expects to be profitable next year.

What is curious is that there was a lag. November 14, 8k. PLUG noted  

The Company continues to experience a significant increase in its bookings since it announced a $6.5 million strategic funding round from partner Air Liquide in May 2013. Orders have been fueled by the investment news, coupled with an investor update on October 8 ^th . On this call, CEO, Andy Marsh, discussed the Company's plans to expand into providing hydrogen, its growth in European markets, and several multi-site customer deals that were in negotiation.

***

I'm expecting a 'blowout' number of orders in the fourth quarter as we start to close some of these multi-site deals and gain new customer wins. I believe that this momentum will result in the 2014 revenue we need to achieve our EBITDAS break even goal."

Yet on an YOY the earnings were not spectacular.   $4.6 million v 4.8 Million.  down 200k from the prior year and they had shipped fewer units.

So why was the CEO expecting "blowout numbers" and why did YOD eventually shoot up over 100%?

On December 4, 2013 The company issued a PR:

The Company has seen an additional 17.8M USD in bookings. Plug Power is currently in negotiations with large customers on sales agreements to deploy turn-key GenDrive solutions at multiple distribution centers. The Company believes this will significantly impact the fourth quarter bookings, as well as provide a recurring revenue stream from product, service and hydrogen contracts. Plug Power expects orders to range between 30M and 40M USD for the fourth quarter of 2013.

Again, the CEO used the phrase "blowout quarter."  This PR started the frenzy.  

Observation:  The initial move was signaled and you can see in hindsight why this happened.  But if you weren't watching PLUG and reading the 8Ks would have it shown up.  I doubt it.  It went from .55 to 67 cents on double volume.  Which would not have been enough to show up on any scans I currently use. 

On December 4, the Company put some meat behind the numbers 10x the revs from the prior quarter.  PLUG Spiked to a high of $2.24  but then slowly retreated on ever decreasing volume.  A low of 2.2Million shares traded  2 days before the next breakout.  By that time, PLUG had given back 1/2 its move as it settled in at $1.60s

• Observation: Unless traders bought right away on December 4,  most of the breakout buyers were probably sitting on losses or at best had scalped small moves.  

• *Entry: This quiet period would have presented the second entry if the Press Release trade was missed. On a weekly chart this was 2 weeks after initial move.

The next catalyst was Plug issuing a PR stating that they had made their "order target":

"Plug Power has seen significant traction closing out 2013, and we expect the first quarter of 2014 bookings to meet or exceed the fourth quarter of 2013," 

This announcement was good for a move from $1.60s to $4.90 within a week. But by January 27, 2014 plug had traded back down to $2.20.

Then it was revealed that the order came from wal-mart.  Analyst then came out of the woodwork saying they anticipated more orders from other big-box retailers and supermarkets. A frenzy ensued pumping PLUG within just a few days to over $10.00.  But faded quickly on news of a secondary offering

Q1 Earnings The next highlight is  First Quarter earnings in May.  

By this point PLUG had sold off to a low of $3.62 

Highlights of CC 
But again the announcement was very positive:

"Already to date in 2014, Plug Power has over $80M in bookings – double the bookings from 2013. Plug Power attributes this increased growth to the successful launch of its GenKey business. The company expects to ship over 650 GenDrive units in the second quarter."  

Plug has now settled in at $5.65 and gone quiet.

• "Year-to-date, the backlog has increased from 1,439 units to 3,719 units as of mid-April. "

• Plug Power’s full year 2014 booking target is $150 million. This year we have already almost tripled our backlog from 2013 and are more than halfway to our bookings goal for the year. 

• the factory has never been this active.
• Q1 was 165 Units so Q2 should have exponential growth.

Potential downsides:

• Dilution via  secondary offerings.  
• Margins on service business were down. Plug explained that this was to help facilitate the Walmart deal but would be positive by Q4.

 Is there another Run?

I had began this analysis as a mental exercise wanting to simply document a monster move that had run its course.  After spending  4 hours of this process, I'm actually believing that there is another big move still to come.  

Plug was somewhat neglected after the first run and perhaps Q2 earnings would take some by surprise. If there is a good entry point, PLUG might be worth a buy.  The downside risk is that with the expected earnings numbers already thrown out it might not cause the buying panic that leads to a monster move.  That being said, I believe a significant move to the down side is also limited.  

I'm very tempted to pick up some shared in advance.  I know, I know,  false positives. ...