The stock market is the only place where they put on a sale and everybody runs out of the shop!
And that is why I started the week with one open trade, and I ended the week with zero open trades. It’s at times like these that I believe it is best to sit 100% in cash, with your shopping trolley ready and your shopping list in your hand, so that when the market stops over-reacting, the fear has subsided and the bounce eventually comes, you can pick up all of the bargains that are on offer.
I refer back to my trading rules which I posted on 11th January 2020…
Rule number 5 – protect my capital at all times. Accept that losing is part of the game. Aim big, miss small. Don’t let small losses turn into big problems. Hold and hope is not a strategy.
So…let’s get the bad news out of the way first. The global markets were in full panic mode thanks to the Coronavirus spreading around the world. From the Dow Jones index to the FTSE 100 index to the price of Oil, everything took a hammering. Apparently over $6trn has been wiped off the global stock markets. Wow. The VIX indicator dubbed the Fear index touched its highest point since 2011. And our old friend the FTSE AIM All-Share capitulated from its weekly high of 973.01 to close the week at 856.64. It’s biggest drop since the end of 2018. Miserable.
And the good news…erm…well there isn’t any. Right now, it only looks like the beginning of a sustained period of pain. Sadly, the media continue to lead with panic and fear headlines as the virus continues to break out around the world and more people are losing their lives. Whilst the numbers aren’t huge, there have been enough deaths to cause panic within the global markets, and until they put the Coronavirus in a headlock and kick the shit out of it, it looks like the pain is here to stay. Stay diligent folks. Oh, and to all of the medical experts now filling up my Twitter feed, keep up the great work Doctors, LOL!
It is therefore unsurprising that the only mover and shaker I saw this week on the junior market was Eddie Stobart (TICKER: ESL) after it released its interim results on Wednesday and it’s trading on AIM was restored. The share price initially opened 90% down, but therein lay the opportunity. A good old Dead Cat Bounce. Unfortunately, I was watching tv so I missed it, but punters were treated to a bounce from a low of 4p to a high of 20p, a nice 500% move.
If you didn’t trade it, let’s take a look at how you could have.
At a time when the global markets are tanking, I would’ve taken extra caution with my risk management strategy, making sure I limit my risk as opposed to concentrating on how much of a reward I could make. I would have therefore approached it with ultra-caution, maximum discipline and with a strict trading plan. And I would have had to have acted super-fast as it moved at lightning speed.
Trading plan
As it bounced, I’d have waited for it to find a resistance level and a support level, so that I could calculate the Risk/Reward and my Entry/Exit levels, rather than just buying at any old price (poor discipline).
Taking a look at the below 1-minute chart, after the bounce it first found resistance at 5.48p and then support at 4.74p. As such, I would’ve used these levels to determine the following:
- The price to sell at if the trade went wrong (my stop loss).
- The price to sell at if the trade went right (profit target).
- The price to buy at.
As a Risk Manager, I always take care of the downside first. Limiting my risk keeps me in the game.
So, where would I have placed my stop loss? To determine this, I work out what the risk is if the trade didn’t go my way. That would have been quick and easy to decide, the risk on this trade would’ve been it broke support at 4.74p. Therefore, my stop loss would have been just below the 4.74p support level, so that I had a bit of wriggle room should the price retest it. So, let’s say 4.5p.
I would have then looked at where to take my profits. It would’ve been nigh on impossible to give a specific price as it fell from 70p and there was no way it was going back there. So, I would’ve been quick and used a typical profit target of 10-30% (conservative I know, but nobody knows a share price will multi-bag until after it happens). Let’s say 30%.
And lastly, I’d have decided on my buy price. And I would have had to have chosen between buying when it bounced off 4.74p or if it broke 5.48p resistance. As it was super-fast moving, I’d have probably waited for it to break resistance at 5.48p and bought as close to that as possible. So, let’s say 5.5p.
Risk:Reward ratio
Risk: Buy Price (5.5p) – Stop loss (4.5p) = 1p
Reward: Profit target (30% = 7p) – Buy Price (5.5p) = 1.5p
That would mean I was risking 1p for a reward of 1.5p, so a Risk:Reward ratio of 1:1.5. Not brilliant, but not bad either.
The result
Had I bought at 5.5p after it broke 5.48p for the first time, my trade would have successfully avoided my stop loss at 4.5p and hit my 7p profit target. A nice 30% win on a day when the world was ending.
Of course, I could have adjusted my profit target as the trade progressed. There is nothing wrong with that if you feel the price action is going higher.
Food for thought the next time you see a Dead Cat Bounce. Well done to everybody who traded TICKER: ESL profitably.
Right, that’s me done for another week, and the way the markets are, it might be a wee while before you hear from me again.
Until next time
Tosh
Author: Tosh Lines
I am a full-time trader who focuses on micro-caps, a freelance writer, and when I am not staring at the screens I am most likely climbing 3 mountains in 1 day for charity @_MarysBoys
Please note: I have a new Twitter account @_TradeTheTicker please give me a follow!
