In such illiquid stocks, how do you get out if it trades against you? | stockbee

4/15/2007

In such illiquid stocks, how do you get out if it trades against you?

Pleadership asked
"You did not really answer the question? In such illiquid stocks, how do you get out if it trades against you? This is at best a 50-50 business so you must have a rule to ensure your position size does get too big relative average volume. Or not? Maybe 10% of 30 day average volume? In general, I do not think you are trading much money, because otherwise you would have such a risk parameter."


As I have said I do not trade Goldman size portfolio but a decent sized account.
My max positions in number of shares in last year have been in 5000-7000 shares range. My strategies are designed for aggressive growth in my current account. I do not worry too much about its size, I worry about growing it aggressively, while prudently managing risk.

After a initial year brush with major draw down in one thinly traded stock where I lost 30% within matter of minutes, I am extremely cognizant of risk.

How do I exit such stocks:

  • I exit on trailing stops. Trailing stops move more aggressively as profit in my position increases.The moment I have more than 50% plus profit in a position, I move stops aggressively to try and protect profit as much as possible.
  • I exit if I see volume increase but price is not making corresponding move up indicating churn. This is very common in stocks after they made major moves.
  • I exit if stock goes in to a climax run.
  • I reduce my risk by timing entry after a 65 day weakness in strong trending stocks.
  • I use a liquidity filter on all trades except the earnings trade, where the nature of trade s such that the earning acts as a catalyst on such stocks. Here again I am buying after an event, which reduces risk.
  • I buy stocks after they have already moved 100% plus from 260 days lows. The first 100% move is where the liquidity comes in on neglected stocks. Anyone who makes an effort to go though all the stocks in 100% plus universe will understand that by the time a stock makes 100% move, the liquidity has increased in majority of cases.
  • In Episodic Pivot, which is the main method which contributes to my profitability currently, anyway the minimum volume requirements for a stock to come on scan itself are significantly high. That automatically weeds out low liquidity stocks.
  • Above all I use a market filter to identify less risky and more risky periods. It is my observation that the stocks I trade and some of which are thinly traded, have big adverse moves only during certain periods. By trying to avoid such periods the risk is lowered. When 50% plus movers in month are above 20, I have least amount of money at risk and willing to go in to cash at any moment.

I am very conscious of risk in everything I do and try and control as much as possible by controlling what I can control.

I have also given lot of thought to how I will play this once my size account size increases. At a bigger account size in few years, I will trade this with anywhere between 50 to 100 positions in portfolio with each individual position ranging from .5 to 4% of account size based on liquidity.

Besides that I think I have an inventive mind and confidence that I can design strategies even if I have to trade billions. Besides the strategies which I have talked about publicly, I have in my arsenal many strategies suitable for trading higher liquidity stocks or the large caps or the Index. So I will trade the big account differently.

When I last checked the list of successful traders and studied their biographies, at least in my studies it shows that most of them started with small accounts and built them up.

8 comments:

pleadership said...

It seems by your tone that you have taken this very personally. However, in reviewing your summary I still do not see a clear answer. It required 1 line, maybe two. Instead, you gave an essay. So if the stock trades 100,000 shares on average (which many stocks do after a 100% gain) you would buy 20,000 shares? In other words, you would own 20% of the average daily volume? How do you get out of that position if a stop is hit? Trailing stops or sell stops are great, but if you own so much of the stock it means nothing...you are trapped. Risk management is far more than stops. As for your inference that I do not look at stocks up 100%, you are right I do not screen for those stocks. I have my candidate model rooted in something more substantive and concrete. And your mention of having 100 positions ranging from .5 to 4% of capital is funny. Why not just buy the SPY, DIA or QQQQ? Your portfolio will mimic the market. That answer alone shows that you really do not know much about portfolio management or have experience managing large sums of money. Hey, that is okay. We all start somewhere as you said, but I guarantee you that they were not writing a bunch of prose that they believed was actionable investment mentoring (but, in reality was not). A word of advice; do not let good sound comments from amateur traders validate what you are saying. You will only continue on the same course. This was never personal and it was a fair question. Your insecurity made it personal.

The Sound said...

Pleadership - how do ad hominem arguments help?

Art said...

pleadership it is the "essays" that the rest of us learn from. Each sentence is packed with wisdom and years of experience well thought out. Those are the times the rest of us say "Thank You Paradeep".

markatkar said...

Pleadership:
Your blog is fine for a debate. However, Stockbee is a reflection of personal investment of the its owner, in this case that of Pradeep Bonde. All questions, opinions are personal. There is a fine line between inquisitive and judgemental. The idea is to learn from each other and use good common sense in making value judgements. Please be gentlemanly and kind. You are not required to be supercilious, if you do not agree. It is one opinion against another. As long as you respect his, we will get along fine.

Pradeep's methods are original and leads one to ask questions, of what goes for conventional wisdom. You may or may not agree with every word he says. Rest of us will find large nuggets of imagination and thought provoking ideas.

James said...

I'm learning a lot by reading this blog. What I like is precisely what pleadership doesn't like: you won't find golden ruled or a step by step procedure.

I used to be unsatisfied with that too. However after reading all the posts in the archives (yes all!) I now understand the frame of reference of the author. I 'get' his method (the concept, not the implementation details which are less important).

Now I know what kind of company I want to invest in and why. That will help me select the stocks I will buy (equity selection is one of the best way to reduce risk).

The reason you won't find a unique answer to a question here is because there is no silver bullet in this game. Depending on the situation you will do one thing or another.

Anthony said...

why should I buy stocks after they have already moved 100% plus from 260 days lows? Why not buy while they are making the move? I'm not sure that I understand liquidity...

Andrey said...

Pleadership,

I agree with some of your comments, but they are very true for swing trading and relatively short-term trend trading. Stockbee probably belongs to neither.

I think that 50 to 100 positions are possible only if one's trading account is over $1 mln and only if one is doing longer term trend investing. In this case a large loss on one position is small relative to the overall size of your portfflio - does not violate the 2% loss rule. Also, most cheap stocks under $10 a share are very risky for a small portfolio - should be avoided by a person with a small portfolio size (under $100,000).

Most stock picks that Stockbee mentions are very likely to result in a loss for swing traders because some indicators -- such as bearish divergence in MACD and the price positions within the price channel for many of these stocks -- indicate that the stock price is likely to fall very soon.

Otherwise, some of the thoughts and ideas that Stockbee shares in his blog are interesting. One should not follow them any way, but some thoughts can be put to testing and probably even applied within one's own trading system.

Pradeep Bonde said...

Facts, fiction, opinion, and claims.
Fact: I said my max position last year was 7000 shares.
Fiction: 20000
Claim: I have my candidate model rooted in something more substantive and concrete.
Fact: Secret models can claim to be always better than disclosed methods.Most of the time such claims can be easily tested.

Claim:"your mention of having 100 positions ranging from .5 to 4% of capital is funny. Why not just buy the SPY, DIA or QQQQ? Your portfolio will mimic the market. That answer alone shows that you really do not know much about portfolio management or have experience managing large sums of money."
Fact: Trillions of dollars are traded that way. Obviously you have not heard of mutual funds and ETFs and hedge funds who buy basket of stocks and rebalance frequently.. SPY, DIA, QQQQ component stocks seldom make 100% move. A 50 or 100 stock portfolio of stock from 100% plus universe will outperform SPY, QQQQ, DIA. All micro and small cap mutual funds do that.
Your this statement itself shows your lack of understanding of market structure and players like mutual funds and ETF.

Fact: There is mentoring in my profile and hundreds of time I have mentioned that I mentor young managers and MBA students.
Fiction: I have mentoring service for investors.
Opinion:A word of advice; do not let good sound comments from amateur traders validate what you are saying. You will only continue on the same course.
Fact: Thanks for your advise.

Claim: This was never personal and it was a fair question. Your insecurity made it personal.
Fact: Your own superiority complex makes you believe that I took it personally. I answer all questions and everyone knows that.