Review of trades in week 17-21 March 2008

GOLDEN AGRI

On Tuesday 18th March I made my first short trade ever. Oil prices had taken a tumble overnight. I thought to myself maybe palm oil stocks might be headed down.

After taking a look at the charts for Indoagri, Golden agri, and First resources I saw that Golden Agri had the best chart pattern for a short.

However the markets opened up and there was a rally across Asian markets. This was after the US Fed announced it's deal to help fund JPMorgan's buyout of embattled Bear Stearns for $2 a share. The Dow had tested recent lows but managed to close green.

Anyway being very new to this I was rather skeptical. Halfway around 11am though I suddenly took a look at the price and it was 0.86! That means the price had broken below 0.88 signalling a breakout downwards from a double bottom top pattern.

I went ahead and shorted Golden Agri at 0.84. I followed the market depth and when prices made a reversal at 0.79-0.80 I decided to cover my short at 0.80.

Subsequently the price dropped all the way to 0.705 as I had measured on my chart and then closed at the 200 day moving average.

But nevertheless this was a profit for my maiden short and a great start.

For Golden Agri details of the planned trade were as follows:

• Sell : 0.84 Stop limit : 0.95
• Measured target 0.705
• Number of lots : 10
• Stop loss value : -$1197
• Measured target gains : $1266
• Short covered at 0.80
• Final gains : $310
  

Rationale:

• 30 day ATR was 0.077
• Volatility stop = 0.077 x 1.5 + 0.84 = 0.955
  
• Looking at the high of the prior 3 days this coincided pretty well with the high of 0.965 on 13th March.
  
• Position sizing wise, a short of 10 lots would have resulted in a loss of $1197 if I stopped out at 0.95. This was my comfort level and I chose 0.95 as a result.
  
• Looking at the gains on measured target this gave me a win:loss ratio of 1.06
  

Wilmar

The night before, Dow dropped almost 300 points erasing almost 3/4 of the gains the previous day. Asian markets took a beating. Oil prices had fallen and commodities like gold also plunged overnight.

I was looking to short the palm oil stocks again. Thought that Golden agri already had their move. And I switched to Wilmar. (actually was looking at shorting China Sky, Ezra, Chartered, Genting, KS Energy, Indoagri also but I chose Wilmar!)

Wilmar looked like it had made a confirmation on a breakout downwards of both the poorly formed Head and Shoulders Top as well as a break below the support upward trendline. I wasn't too keen on shorting this at first because of the nearby horizontal consolidation from 3.50-3.60. When the price started to go below 3.50 I thought it might drop to the 3.25 or even 3.10 support level. So I thought let's give it a shot.

Unfortunately this was just one of those days. I shorted at 3.49 and it went down to 3.44. The whole day this stock was extremely volatile. At one stage it hit a high of 3.73 but later went back to 3.57. I looked at the fibonacci retracement levels and found that 3.76 represented a 62% retracement. And if this stock went past 3.76 then it would be an actual reversal. My stop limit was 3.80. And at about 15 minutes before trading closed I had to execute my stop. But luckily I executed it! Because for the next 10 minutes the stock rallied all the way to $4 and closed above the 200 day moving average!

I feel down for losing money, but slightly happy that I managed my emotions and performed what I needed to do with little fuss.

Trading is like that. There will be days you make money and days you lose money. But you want to have an average that makes you profitable. Practice and learning will improve me as a trader. In any case today's trade was not really wrong from a chart point of view but some finer points were highlighted to me by a good friend.

For Wilmar details of the planned trade were as follows:

• Sell : 3.49
• Stop limit : 3.80
• Measured target 3.25
• Number of lots : 3
• Stop loss value : -$1048
• Measured target gains : $610
• Short stopped out at $3.80
• Loss: $1048

Rationale :

• 30 day ATR was 0.25
• Volatility stop = 0.25 x 1.5 + 3.49 = 3.86
• Looking at the high of the previous 3 days gave a figure of 4.11 which was too high for me.
• 3.80 also looked to be the level of the upward trendline that Wilmar had broken.
• At 3 lots, a stop limit at 3.80 would have a loss of $1048 and I settled on it
• win:loss ratio = 0.58
  

Learning points -

Rule #1 :
DO NOT SHORT BLUE CHIP COUNTERS UNLESS THERE IS CONFIRMATION OF A DOWNTREND .

Eg in this case a 1-2-3 confirmation of the breakout below the trendline, or a pullback followed by a drop below the previous low of the breakout and established a downtrend. There are pros and cons of shorting a reversal pattern on the first breakout.

Pros : The breakout move is stronger without pullbacks and you catch it right at the top.
Cons : You are likely to get pullbacks and false breakouts.

So it depends what you want. Bet hard and gain big? Or play safe?

It is thus not advisable to short blue chips on reversals unless you get confirmations because pullbacks and false breakouts are more common with blue chips.

Rule #2 :
SHORT STOCKS THAT NOBODY IS INTERESTED IN AND ARE ALREADY IN A DOWNTREND

Chances are that your results will be better in terms of expectancy but gains may not be so fantastic.

Rule #3 :
IT IS SAFER TO GO LONG ON BLUE CHIP STOCKS AND SHORT "NOBODY WANT" TYPE STOCKS IN DOWNTRENDING MARKETS

My good friend once again gave me this advice which I think is VERY WISE. Think about it. Blue chips are closely watched. And they can have share buy backs etc. So why try to short them?

Rule #4 : LET YOUR PROFITS RUN AND CUT YOUR LOSSES!

If I had stuck to this simple rule my overall week performance would be black instead of red.

All in all this was an interesting week for my first foray into shorting and true trading.

My trading records for the week are as follows

Shorted Golden Agri

• 10 lots
• Sell 0.84
• Buy 0.80
• Gain : $310
• Gain 3.86%

Shorted Wilmar

• 3 lots
• Sell 3.49
• Buy 3.80
• Loss $1048
• Loss 9.15%

Overall profit loss for the week -$738

So I hope next week's trades are better for me! :)