Auspex · @AuspexResearch
21st Feb 2015 from TwitLonger
This is regarding $AXN. Not sure how this TwitLonger thing works ...
To the guys asking me about $AXN, I submit the following:
Rule #1: My trade must be fundamentally-based. Therefore, I have to know A LOT about a stock/company before I enter a meaningful trade. Due to the lack of volume, $AXN would not have been on my watchlist coming into the trading day on Friday. It would show up early Friday morning on a simple % Gainer scan. That being said, it would take a few minutes to get through the recent Q and Ks and whatever news was out there and to determine what news might be coming (pharma play might have some binary event or something). As I am sifting through all of that data at what is hopefully a lightning pace, I would monitor the volume and the price (these are your best friends. You can throw out any and all other stupid little lines that your charting software might generate for you. Everything meaningful is a mathematical computation of 2 things: price and volume ... especially as they relate to themselves in recent history (MAs, RSI, Stochs, etc)). To me, all those lines just create clutter. Price & Volume. Price & Volume. Price & Volume. Relativity. Relativity. Relativity. Got it?
If I am now hunting $AXN for an entry, then there is not enough cumulative volume by 9:45 to warrant a meaningful position. The price has done what I might want, but the Volume component is not yet there. This is extremely important to remember: WITHOUT PREVIOUS VOLUME, THERE ARE NO BAGHOLDERS YET. THERE WILL BE NOBODY TO SELL THE STOCK BACK DOWN.
I want to make sure that there are enough idiots in a play so that when it rolls, there will be a collapse and a liquid collapse at that. Shorting a low-volume or relatively illiquid stock is suicide if you ask me.
All of that being said, by 9:51 I think it was you have a 1 minute bar with over 200k in volume. I do not know if that was a block trade or what because I wasn't watching the Level 2 live. This is all just hypothetical. I would also want to watch what kind of trades were going off in time and sales to see if that huge relative 1 min spike was 1 trade or 100 trades ... big difference. 1 = no real liquidity. 100 = a lot of potential bagholders.
I would have to be damn certain about a lot of things regarding the fundamentals, news, potential news, etc to look for an entry this early ... even though we all know that an entry soon after that would have been perfect.
Most likely, I would have watched it fall from that "10:00AM" high and sat back to see if it would bounce back towards that 10:00AM high. The 10:00AM high becomes a super easy target for your stop loss if you want to enter this trade going forward. IF, and I stress IF, I was confident in my fundamental research, then I might look to short this on what I would consider a Day 1 pop. But, I would not go in heavy ... this would be a "side trade" where you do it for #$% and giggles with enough money to put a smile on your face if you are correct.
So, I simply mark the $2.60 area. Maybe it goes back to $1.40 or so if this is all just stupid hype (I do not know because I did not fully research this one. I think it was just a dilutive hype job to stay listed, but its also Chinese (I think) and possibly making a penny, and the books will probably be cooked at some point. So, there are a lot of factors that are stories for another day about this thing. I'm just talking technical spots for the trade now). If I think it can go to $1.40 (for whatever sound and logical reason) and $2.60 is my high, then I simply take 2.60-1.40 = 1.20 and then half it (50%) = .60 and then subtract that from the high: 2.60 - .60 = $2. This becomes my realistic target zone (which usually has a boundary on both sides - call it 10%) if I expect the short term price action to revert to a mean.
The next step is to set up your Reward:Risk profile for the trade. I do this by simply planning my entry IF IF IF the stock bounces up in the future (remember we are doing all of this at roughly 10:00 AM. Now, the stock has pulled back and is at $2.10. Do I enter here? NO. If my target zone is the $2 area, then why am I going to enter $2.10 if I do not have absolute certainty that it will not go back to test the recent high and perhaps even break it (remember this is a Day 1 pop). I sit on my hands, look around for other plays, and keep this on watch if it starts to creep back to that resistance area around 2.55-2.60.
If the stock trades up to say $2.40, then I might begin to SCALE INTO a trade, meaning I know that I am NEVER going to perfectly hit an absolute 1-min chart top (and conversely, I will NEVER hit an absolute bottom on a cover. This is a topic for another chapter in a book that should be written one day, as it is extremely important for a trader to understand in order to maintain proper psyche.) So, maybe (for easy math) I want to have 1k short if the stock hits 2.50. I know it is not going to go exactly to my target and I will be the only guy sitting on the offer with my 1000 shares that get taken like clockwork 1 second before the stock collapses. (I hope you pick up on my sarcasm there). So, I might say to myself, lets go ahead and put 300 out there a little early just in case my gut is right and this thing is completely doomed. I am risking roughly 20c downside (2.60-2.40) in hopes of making maybe .40 or possibly more (2.40 to 2.00 target zone). But, I am doing this with only a 30% position or so. So, if it goes badly, then no biggie. Now, if the stock bounces on up to 2.50, then I will look to enter the rest of the position because at that point the Reward gets closer to .50 and the risk goes down to roughly .10. That is 5:1 at that point.
This is lengthy text, but it all happens in a few seconds in your head. Not to worry.
As the day plays out, I might not get my full position on this one, but I would make at least 15% on a partial position, and that would put a smile on my face at the end of the trade ... and if you remember, that was the original goal of this exercise.
The stock would go on to rest right there in the target zone around 2$ give or take 10%. At that point, you can cover some and lock in profits and leave a little bit on in case it melts on down next week. Then, a small position becomes a decent gainer for you.
Hopefully, it regains strength and creates a new pattern and new extension in the future. At that time, we will have ample homework done, and if there is massive price and volume deviations, then we can enter a meaningful position and rake in some real coin.
All of these little setups funnel from one of my screens to the next until they end up on the last screen where things like $GENE, $WSTI, $ADXS, $VOIL, etc end up. Those are the ones that I dive into head first. You can see Seeking Alpha articles on things like $VOIL and $WSTI. The research is easy on those, but it is in-depth nonetheless. $GENE needed a story, but I deferred to some higher ups with greater reach on that one. Point being, the biggest and best shorts take time to develop and time to plan. Things like $AXN are just trades that fill in the time between the larger projects. But, you can learn from these tiny plays just as you can from the large projects. In the end, that is one of the most important parts of this game. If you are not constantly learning, then you might as well go burn your money, because you will not last long-term. And, when I say learning, I mean learning something meaningful that allows you to see through the BS, to see what the sheep are thinking, and to develop a plan to profit from that. This does not mean blindly following a self-fulfilling prophecy. That only makes you a part of the flock. Ironically, it also means that you should not follow my advice, either. Rather, I hope you take this absurdly unabridged answer to your relatively simple question and do nothing more than think about it. If it makes sense to you, then apply part of it to your trading strategy. But, make sure that it is YOUR trading strategy and not simply a vain attempt to copy what might work for someone else. Good luck out there!
:)