Wednesday, 1 January 2020

TRADE OF THE WEEK #29 - EKOVEST BHD (BANDAR MALAYSIA AGAIN!)


Outcome
Gross Profits : RM5,200
Return on Investment : 11%
Duration : 2 days

Let us get one thing out of the way first. We don't understand how/why people trade stocks like EKOVEST and IWCITY.

This is why : we see such big volumes traded, meaning that many, many people out there were making seemingly do-or-die bets. 

We also know that people have been making months/years-long bets for these counters to gain. 

This activity is all down to Bandar Malaysia, that mythical mega-project that will save us all - and by 'all', we mean Malaysian property developers, construction companies, and uncle punters. 

Truly, uncle, you are the master of your domain. And by 'domain' we mean crazy-ass bets that we ourselves are too frightened to make. We thought we were risk-takers; we pale in comparison to the uncles who buy millions of shares in EKOVEST & IWCITY using their margin accounts, with the expectation of them going up.

And you know what? The bets did pay off - this time, at least. The secret ingredient to stay invested is really to have absolute faith in the big boss, the government, and the project. We are not being sarcastic or cheeky; a good trade is a good trade.

“But Pel, you were also in this trade, right?” You may ask.

The answer is yes, but we were really small fry sideline traders. Our gains are minuscule in comparison to the master traders, some of whom probably bought millions of shares using margin financing. 

OK, this is the part where we get a bit cheeky. Because our trade does not involve having any faith at all in the big boss, the government, or the project.

For context : we are intimately familiar with the Bandar Malaysia angle. We have traded it since 2015. The only difference between now and then is that Jibby is no longer Prime Minister. But the thematics of the Bandar Malaysia project is still similar; it was just tweaked a bit.

And boy, we have had some lovely experience trading this theme! On balance, our last big trade were successes, but they were also traumatising. Basically we got spanked and then thrown into the meat grinder; the fact that we had any profits to show for it was a legit miracle. 

Traumatising or otherwise, we know a tradeable angle when we see one. So we are not averse to consider this angle again.

But the cheeky part is our little insight here, which will go a long way towards explaining this trade.

Sometimes, the technicals can filter out the noise. We don't care about how high people think the stocks can go. We definitely don't care about ‘limit up’ potentials. Some of the ‘sifu’ trading group chats were downright hysterical about this. We are simply amused.


Nonetheless, based on experience (and some intuition), we saw a trading opportunity with some serious upside potential. And a price breakout is what this boiled down to.

We can tell you that the price breakout strategy works. Price/volume analysis is our domain, hence the 'breakout' in the stock price - beyond their consolidation range - is a validation for us to pull the trigger on a trade. We were reactive.

What the uncles have been doing were not reactive, but anticipatory - they would have simply bought during the consolidation period, knowing that the details for this (new iteration of) Bandar Malaysia would eventually be finalised.

But this range lasted seven whole months - and we don't have enough cash to just go in and wait. We don't, and can’t, trade that way.

THE TRADE


We are fidgety beings. Unlike many self-professed trading ‘experts’ out there, we are distrustful of our own predictive capabilities. We get served humble pie often; it’s really a staple of our diets. As it should be : the moment you think you’re a genius, that is when you’ll lose everything.

We are saying this to differentiate ourselves from the ‘cowboy’ speculators out there who can make gigantic bets with lousy odds. The chance to gain RM50,000 in profits is not something we’d consider if there’s a close-to-equal chance of losing RM49,000. 

Our competitive advantage is not our predictive powers. Rather, we can unwaveringly commit to an idea, within acceptable risk, and for limited duration. We only stick to what we know best, and in this particular instance, it’s the commitment to trade early stage breakouts.

Let us simplify a core pillar of our trading philosophy. This one is on the technicals side of things - pure analysis of charts, and movements in volume and price. Our specialty.

Our belief is that the earliest stage breakouts offer the highest profit potential. Let’s call it Stage 1.

With each subsequent Stages, the opportunity for profit diminishes greatly. This is basically why we almost never do repeat trades after profiting from the Stage 1 breakout: because Stage 2 & Stage 3 might either be false breakouts, and worse yet, random price fluctuations. We learned not to touch these phases from experience, and from tens of thousands of ringgit in past losses.

Another reason why you should never trade Stages 2 & 3 is simple : hubris. If you had made huge gains in Stage 1, you’d start having a higher opinion of yourself. You’d think of yourself as a sure-can-win master of this stock. In other words, ego gets in the way - this is always bad for business.

Another rule : the longer the consolidation period, the stronger the breakout. But ! A caveat : don’t get emotionally invested about the sustainability of the breakout: it might fail a few days later and come crashing down.

To explain this properly, it’s helpful to understand the context of EKOVEST. Why the stock broke out, and why it failed to stay up.

To start with, look at this.

The above is the daily chart for EKOVEST from April to December 2019. The most important bit is to look at the spike at the right side: this was the major price breakout which occurred on 13 December 2019: a big move from 82 sen to 90 sen.

More importantly, the ‘breakout’ represented a seven-month high for the stock. Due to the lengthy consolidation period - defined as the flattish price movement from April to December between the 70-90 sen range - the 13 December price breakout was a strong one.

Evidently there were lots of volumes and buying interest coming into the stock. This much is clear. The second part is the ‘why’ of the breakout, which of course is no secret : it was related to the Bandar Malaysia announcement.

That’s all well and good. Now for the five-thousand-ringgit question : how do we know to buy into the stock right at this point? Surely there’s a chance it could fall back thereafter.

Of course there’s a chance. The trading skill that you need to have to undertake this trade is this: commit to a position, take responsibility for the risks assumed, and know when to exit.

In layman’s terms, let us simplify this down to the molecular level. To begin with, we chose to trade EKOVEST-C3, a warrant with good liquidity and volume characteristics that we prefer. It’s also attractively priced. (Editor’s Note: here’s the guide for choosing the right warrants)

A little short story to explain our thinking:



EKOVEST just broke out. It’s a strong move - seven-month highs.



Oh look! There are huge volumes at around 90 sen! It didn’t really weaken for the rest of the day. 



It already peaked at 92.5 sen earlier, but the major accumulation seems to be at 90 sen. And by huge volume, we mean that it’s hugeee.



OK, so we’ve got a choice : do nothing or buy near the market close? EKOVEST-C3 doesn’t look too bad at 19 sen. Parameters are simple : if EKOVEST breaches 92.5 the next day, we’re gonna see major gains on the C3 call warrant.



It’s really an arbitrary set of decisions:



EKOVEST breaks 92.5 sen immediately next day - PROFIT

EKOVEST falls below 89 sen - TOO BAD, TAKE THE LOSS


Add the following condition : EKOVEST must break 92.5 sen within the first two hours of trading the next day. Otherwise we’d exit - maybe even at break-even levels, with no loss other than brokerage fees.



OK, we decided to take up the trade. The estimated gains are worth the trouble. We think there may be a small window of opportunity for a quick exit at the peak of the buying frenzy in EKOVEST, IF it happens.



End of story. 


We explained as much to our followers on 13 December.

Notice that these are very specific set of events that need to occur for us to even stand a chance of realising any profits. Only one permutation out of the many possible outcomes would make this work. We trusted our understanding in the technicals, and of course, our collective experience in the markets.


Long story short : we’ve seen this trading opportunity before. We just have to be smart about the execution.


The next Monday, on 16 December 2019,  EKOVEST gapped up - the stock opened higher than its previous closing price - and temporarily broke new highs beyond the 92.5 sen peak of the previous day.


We knew we have enough time to exit at a substantial profit. So we cashed out of EKOVEST-C3 while the going was good for EKOVEST.

We absolutely did not care about whether EKOVEST can stay up or - holy shit - break the RM1 mark.

That simply did not  factor into our equation; what matters is that we follow our rules, and take profits when the targets are met. This is admittedly simpler in thinking than in practice; we are all too familiar with the temptation to get greedy.

But this time, there’s a happy ending to this.





EPILOGUE


Now for the sad part. The price breakout was not sustainable, for the simplest of reasons : sell on news. 

The daily chart right after the price breakout looks like this. The rest of December wasn’t a fun one for those who had bought shares at the peak.

From 95.5 sen to 79.5 sen by Christmas. 16% decline.

You may have also noticed that we ended up selling our warrants at the peak of EKOVEST’s move. This had nothing to do with predictive powers - it was just that our trading angle had effectively expired.

The difference between our method and the cowboy traders?

We spent two days and made 11% yields. The risk level was fairly high, but the duration was finite. Quite happy with the profits. Our trading angle was very short term.

How about the cowboy traders? They may have spent many months invested and made gigantic gains, but the risk assumed was simply crazy. They might have been gigantic losses, if EKOVEST had gone south instead.


But then again, maybe we’re just jealous because we have no earthly idea how to trade like these people do. *wink*

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