[pelhambluefund] We traded GREATEC when it debuted on Bursa last week : 3 Rounds, RM14K profits. Here's how.

This post first appeared at http://www.pelhamblueassetmanagement.com/ , the investment site for offbeat ideas, market signals and trading strategies for Bursa Malaysia stocks and warrants.

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There are always misconceptions about the daily work of traders. It is not about being cavalier and gutsy all the time. We do not spend our evenings with booze-laden parties among a bevy of beautiful women/men. We do not aspire to be the Wolf of Bursa Malaysia. 

In fact, if you ever decide to commit to trading full time, here's how your daily routine would unfold.

A Day In the Life of a Trader

7AM - Breakfast. Catch up on financial news and overnight US markets.

8AM - Analyse potential trading opportunities and Malaysian counters that are worth trading (there's only 2 or 3 in any given day, if at all)

9-10AM - Most of the active trading is done within this hour. Either a quick in-and-out or a position buildup to hold onto for the next few days.

10AM - Probably nothing. Do research. Read analyst reports. Read books. 

11AM - Check prices. Nothing to trade at this time. In fact, you might be fighting fires as your positions lose their value. Definitely not the time to buy into anything.

12:30PM - Bursa Malaysia closes for the afternoon. Lunch. Before that? Definitely not the time to buy into anything.

2:30PM - Probably nothing, except if some major corporate news come up during the lunchtime period. Like what happened with TM the other day; that was a great trade.

3:30PM - You remind yourself not to be dumb or tempted to buy into that new counter you just discovered. Anything new on the radar should be observed first for a few days... 

4PM - If you're lucky, something in your portfolio is probably profitable by now. You'd watch for the late stage build up. Maybe that RM1 stock went down to 92 sen early but now it's back at RM1 - a potential buy sign. Or maybe you sell everything.

4:45PM - Market about to close for the day. Analyse existing positions. Check each one against your set of expectations. Have they been validated by the price move? If not, now's the time to cast that ego aside and prepare to dump the counter the next day. Or maybe you'll give it a couple more days for the stock to work itself out..

5PM-7PM - Research. Review the market roundup in Malaysia, Asia, and globally. Know the general themes that are making the rounds in the current news cycle. Everything affects momentum, and if you're a trader, it's something you must care deeply about. 

7PM-8:30PM - Dinner. Maybe read a book (about trading or finance history, of course).

8:30PM-10:30PM - Read research reports, review portfolio, review each trading plan for the stocks you have or planning to have. Come up with 2-3 names to target for the next day, or week. If you like your global thematics, perhaps you can express it by buying Hang Seng index linked warrants. 

10:30PM-1AM - Self assessment. Review your mental state and recent performance. Maybe write everything in your wonderful blog (ha!). Sleep.

7AM - Start over.

Dress for the job? Sometimes we trade in our bath towels. Source.

We have come to understood a very simple, but hard-to-accept fact : the life of a trader is exceedingly mundane and filled with tedious homework and groundwork. It's distinctly unglamorous and it can be tiresome. On days when there's nothing to trade - and there will be plenty of those - you might as well go out and drive that Grab or deliver that GrabFood after market hours.

But your mundane existence will be punctuated by bouts of extremely volatile and extremely profitable trading, which brings us to today's case study. However, even though your active trading period is roughly just those two hours as we described, you do have to observe the market as closely as you can throughout the whole day.

Let us put it simply. On 29 days out of 30, you will be scraping small profits in order to continue your meagre existence. But there may be that one day when you can suddenly make profits that are out of this world. 

There are no easy shortcuts. You have to be vigilant and look for the opportunities. Once in a while a bucketload of cash will show up - you just have to be around to take some. 

 The full-time trader's daily outfit.

We have done all this before. Those outlier opportunities explain how we suddenly could make RM27,500 from REVENUE, RM50,000 in a single week, and RM13,000 from MI.

REVENUE and MI are the special ones - they are IPOs that immediately rallied after listing, blowing way past their IPO prices. The same happened with GREATEC last week, and we took full advantage of that too, as we will show.

As a trading strategy, you should probably take a close look at all the new IPOs and listings. They can lead you towards a huge pile of cash. But it is 99% hustle, 1% luck - most of us can't accept this. 

Our success in GREATEC was down to hustle and somewhat competent risk management. We went in and out and in and out and in and out: 3 rounds in 24 hours. We went out at the first sign of weakness and back in at the first sign of resurgence. We were twitchy but careful with our positioning, allowing us to accumulate big positions each time.

But we also learned something new : when you identify these golden opportunities, go in, and go big. Absolute conviction is necessary. The best traders can handle singular, highly concentrated positions, because they know that the profit opportunities outweigh whatever other stock ideas they have at the time. 

DECIPHERING THE TRADE

So now you know that new listings are exceptional trading events that can deliver fat profits. But obviously not all of them are certain to rise. The key to getting five-figure profits is that you have to identify the stock's potential to go up further and acquire a large position as quickly as you can. 

This comes from directly analysing the price and volume activity within the first hour of the stock's listing. Among the things you have to do:

1) Pay attention to the opening price : is it a healthy premium to the IPO? If so, whoever subscribed to the IPO has an incentive to sell (flip and make easy profits). Perhaps this will drive the stock price down. Who can argue with easy profits?

2) See if the stock actually falls down. This is where you have to assess the stock's liquidity. If there's too much liquidity, and too many shares issued, it would be harder for the stock to go up and sustain a rally. In our past analysis of REVENUE, the stock actually fell far below its IPO price before rebounding. The rebound happens when there are more takers than givers; if the public market can absorb the selling pressure, there is no way to go but up.

3) Come to a conclusion on (1) and (2) within that first hour of trading; all the action typically comes during this time. After that, come up with a list of expectations for the stock. An easy example: if the stock hits xx sen in the next hour, you'd buy xx amount of shares. Another : if the stock keeps gaining one sen or more in each of the next 15 minutes, you should buy into the stock. 

4) Volatility is normal for new listings. A stock's debut is marked by sudden highs and lows. If the stock suddenly hit a new high, and repeatedly hits new highs after that, you know what to do. The new highs should be a validation of whatever fancy theories you have come up with; they are the reaffirmation of your intent to buy. It's time to play and risk your money.

5) Be fast and make the hard calls. The whole thinking process shouldn't be more than 10 minutes: idea, positioning, execution. The rest of the day is just position management. The faster you come up with a plan, and the faster you execute, the higher the likelihood that you will get in at a good price.

6) If all goes well, manage your profits. It's not so easy but obviously this is a nice problem to have. 

The full time trader's daily outfit after utilising our IPO TRADING STRATEGY.

And that's all there is to is. Let us demonstrate what we did with GREATEC, and why it required several rounds of ins and outs. There are many ways to trade first-day listings, but our approach worked for us, and we've had repeated success with it.

FAST RECOGNITION, FAST FINGERS 

GREATEC was listed on 13 June. We've seen the basic financials - it's a great ACE Market company in a growth industry. The stock opened above its IPO price of 61 sen - it's all about whether it can keep that momentum going in the next hour.

In the first five minutes of trading, the stock hit 68 sen before retreating to 64 sen in a frenzy of activity. We has set a simple time-based expectation: if the stock breaks 68 sen in the next 20 minutes, we would build up a large position.

But before that happened, we were willing to go in with a small, exploratory stake, so we bought some shares at 66.5 sen. We'd be out if it hits 63 sen, but we'd grow the position if it hits 68 sen again. Remember, tight stops or death.

If our time-based expectation is met, the next likelihood is for the stock to easily break 70 sen.

Our train of thought from 9:00AM to 9:45AM :

And GREATEC's price movement during the same time period, represented in 5-minute increments:

What happened was this : as soon as our 68 sen target was met, we bought the stock immediately at the 68.5-69.5 sen range. By 9:20AM, by virtue of the chart's positive movement as seen above, and by the level of buying interest versus the selling, we were convinced that the real profits lie way beyond the 70 sen range. It was just a matter of time.

The context of this trade is purely contra : we're looking to wrap this up within the T + 2 timeline (three days), earlier if possible. In terms of managing profits, we are guided by our usual profit target rule : 10% yield and above, or four figure profits, or both, always.

After a comfortable and predictable consolidation phase, GREATEC hit its stride by the morning session close. As of 12:30PM, the stock closed at 75 sen.

 

We decided to sell when trading resumed in the afternoon. Prices failed to breach the 78 sen mark, indicating toppishness. While the stock hovered at 77 sen for a while, we managed to get out at 76 sen, before prices weakened further.

Note the above 10% profits and four-figures that we targeted. This was the first round.

ROUND 2 : BUY ON WEAKNESS

Some people may prefer to hold on to their positions and stick with it for a while. For listings with strong debuts, like REVENUE and MI, this would be a brilliant strategy. You might as well just buy as much as you can and ride the profits for a couple of days; this would have worked for GREATEC too (Editor's Note : at least for the 13-14 June period).

But we approach this differently. Our act of exiting is rules-based, and we didn't want to risk whatever profits we have accumulated at that point. We always have the privilege of going back into the stock if the rally continues. 

Discipline is really the key. It also helps to remember that if a stock goes up swiftly, there's a good likelihood that it can also go down just as fast. In fact, for a stock that consistently rallies over several days, its chances of rallying further diminishes quickly, leaving you with the downside risk instead.

What we do is break up the stock's positive trajectory into several phases. Phase 1 was the early onset rally that was buoyed by optimism, The volumes were there, but there is no guarantee that it would continue. 

For the rally to resume on Day 2, the stock would have to make a strong move right at the open. We considered this possibility, so we re-entered and bought a small position in GREATEC.

The beauty? We sold out of Round 1 at 76 sen and re-bought into it at the 74-75 sen range before the market closed on Day 1. We let go of the stock at a premium and went in again at a discount. The stock closed at 74 sen, so we were about breakeven with this new position.

And on Day 2,  that expectation of a strong move was met.. and it paid off in a big way.

On 14 June, in the first five minutes of trading, we bought some more shares at 76.5 sen and 78.5 sen. There were two key traits here : the stock opened at a 'gap up' of 75.5 sen, and the breakaway was very swift. By 9:05AM, GREATEC had already hit 80 sen.

We did intend to sell at around 80 sen anyway, sensing that this resistance point will be a bit harder to break out of.

Being able to sell at 81 sen was a bonus as we expected the stock to fall back to below 79 sen, and this it duly did.. but not before we exited.  We achieved a smaller but significant profits of RM4,000 in Round 2. It wasn't 10% yield, but it was four figures.

Total winnings so far from Rounds 1 & 2.

After this, chances of quick profits would diminish further. We had to think differently about approaching GREATEC now. But the optimism was still there.

ROUND 3 : DIMINISHING RETURNS POTENTIAL

Here's why it helps to think in phases. Imagine that the profit potential from GREATEC can be represented as a pyramid. The base was Round 1, where the fat profits were derived. Round 2 is the middle, where the profits were smaller. You can guess what Round 3 means.

PROFITS

Round 1 - RM7,000

Round 2 - RM4,000

Round 3 - RMxxxx?

It's not exact science, but the notion of diminished returns can easily be visualised in this manner. By this we mean that Round 3's expected profit upside should be in the RM2,000 range, if we are fortunate. There's also every chance that Round 2 would mark the peak of GREATEC's rally, and the rest of the way is a collapse in prices.

The expected profits from Round 3 serves as a reminder of what's at stake. If we can achieve that target, we'd get out without hesitation. 

After selling out earlier, we were wary of re-entering the trade at 81-81.5 sen. It's too close for comfort and prices could easily break under that range, or below 80 sen.

Since we had sold out during Round 2, the stock had already fallen below the 80 sen mark before rebounding quickly to 82 sen. We took this as a sign of buying strength.

So for Round 3, our range and stop-loss points are tighter. We acquired a position at the 82.5-84 sen range, committing to exit completely if the stock goes back down to 81.5 sen. It almost did, but we managed to hang on.

The rest of the morning was just a quiet consolidation phase, until GREATEC surged to 85 sen by 11AM, a new high for the stock.

We were eager to see this thing through to the 88-90 sen range. But... we didn't think it was going to happen on that day. The chart above represents a rather weak consolidation phase, compared to the one when the stock was trading at 70 sen.

There was an encouraging surge to 84 sen just before the morning session close, so we were keen to exit by this time.

Here's where the 'gap up' at 2:30PM needs to be treated differently. The stock surged to 85 sen, but it cannot be interpreted as a sign of strength, due to the diminishing returns potential as we have explained.

Instead of treating the surge to 85 sen as a bullish sign of a breakout, the opposite is actually correct. It's the dying breath of that day's rally. There was also the slight issue of 85 sen being the obvious resistance point for the stock, since the mark was hit earlier at 11AM.

Diminishing returns are correlated with diminishing stock price increases. Instead of betting the house for GREATEC to hit 90 sen, we quit instead. Our target profit was met, and we ended up selling near the day's high.

The range was small, as anticipated. We managed to achieve about RM2,000 in profits, as intended. That's all that matters.

Our total winnings over 3 rounds in this eventful 24-hour period:

The gist of this whole trade is straightforward: preserve profits, follow the targets and rejoin the market when necessary. To maximise profits out of opportunities like this, you will need to hustle a bit. It's worth the trouble.