In the game of trading, the hunter (aka trader) is always looking out for runner. To do that, I like to observe the following:
1) Look for catalyst that may kick-start a runner
2) Find out the story behind the catalyst and see if a fire exists to fuel the runner
3) Find out which direction the runner is going.
4) Track the runner in the same direction it is going.
5) Let’s the runner leads you. Do NOT try to jump the gun on the runner.
6) Always be mindful that the runner can change direction abruptly and collide with you head-on. This can be dangerous to your health.
7) Due to number 6 above, one needs to know when to let go of the runner.
Last week, I spotted the catalyst (Pt #1) that kick-started my interest in SKF. JPM $2 billion losses was a great catalyst. The story (Pt #2) has a strong scent that reeked of blood and fear. A strong combination to move a runner. On top of that, the looming European woes, especially from Greece, added another dimension to support the thesis in establishing SKF as a runner.
Obviously, since SKF is an ETF (ProShares 2x UltraShort Financials); the direction I expect it to run is up (Pt #3). Thus, a campaign to go long SKF was in order (Pt #4).
So far, we have covered point 1 to 4.
Point number 5 needs a bit more narrative. Knowing the story and the potential behind a runner is not enough. I need to see proof. I need to see price action supporting the thesis that SKF is a runner. If you see a deer running fast by you; you see a runner. There is no doubt the deer is running. Not only that, you know exactly which direction the deer is running to. Now, if you see a deer meandering here and there; do you see a runner? Of course not. And if you try to jump the gun on the deer by guessing the direction it will run (if it even run at all); you can be caught by surprise if the deer run (or walk) the opposite direction than the one you picked.
From the beginning of last week, I needed to see SKF makes consistent higher high and higher low to confirm that it was running. Noticed that I was quick to get out or reduce position because I wasn’t sure if SKF would run or continue to run. From my daily comment; on May 15th (day 2 after I bought) I got stopped out because the morning price action looked like it was going back down and actually went below the half-way point of May 14th where I had my stop. Nevertheless, after I was stopped out; SKF made a higher high by taking out May 14th high. This was the proof I needed to see. Without hesitation, I bought back what I sold for the hunt.
The rest of my daily comment for the week displayed my actions and the thought behind them. Several times I reduced position ’cause I was always keenly aware that SKF could make a sudden dash back to the downside (point #6). And each time after I sold, I also bought back at higher price, ’cause price action continued to make higher high- more proof that SKF was still running.
By May 18th (Friday), after 6 days of higher high and higher low, I knew I needed to let the runner go since it could get tired and was due for a correction (Pt #7). And let go I did; I sold my entire position (from averaging up during the week on the way up). My greed would tell me to hold on for next week since more financial Armageddon over the weekend could stir up a bigger fire to boost SKF even higher. But on the other hands, a general solution (e.g. from G8 meeting this weekend) could also be created to calm the mass and the bank-run; thus fuel a potential gap down correction on SKF. If I’ve to choose b/w the two before the weekend, I always choose safety and sure profit. Sure, I may miss the bigger rocket launch on SKF come Monday; but there will always be another day for me to find another runner with sure cash in my pocket. On the other hand, if I chose to hold SKF over the weekend and SKF corrects violently, I will give back all my gain and end up with nothing to show for my effort last week. That would be a complete waste of my time.
You might have noticed that I followed the same game plan when I hunted DDD and SSYS. The sudden proliferation of news on the 3D printers technology sparked great interest in these two stocks. Not only that, after I bought in, more news from DDD’s acquisition and SSYS merging news with Objet also created fresh catalysts and fueled the fire even stronger. If you read my past posts regarding DDD & SSYS, I continued to add to my position (at higher prices) when I read news from DDD and SSYS. The full coverage on the science of 3D printer technology from The Economists could not come in a better time! More fire!
By the time price started to cool off around May 2nd in the $30ish for DDD and $50ish for SSYS, I winded down my position to lock in profit.
Btw, as a hunter, I prefer to focus on a very few runners at a time. I don’t like to hold too many different stocks at the same time ’cause they distract my attention easily. I would do well on a few stocks but neglected others; as a result, the ones I neglected usually came back to bite me.
Categories: Trading philosophies and thoughts