Category Archives: $500 Experiment
Okay, I know it’s been a long while since I’ve posted, but I wanted to offer a wrap-up post for the $500 experiment. I was sidelined for nearly two months with a freakin’ pinched nerve, and I was in constant pain, non-stop, no breaks, from April 30th to late June. During this time, I didn’t do much of anything except lay around and feel ridiculous amounts of pain. I had to visit a chiropractor several times to adjust my spine back to normal, and thank GOD I feel better now.
Anyway, before the horrific injury occurred, I managed to squeeze in a couple more trades in Body Central Corp (BODY) and American Apparel (APP), both of which turned out to be profitable, if only by a very small margin. I am quickly learning that I would rather take small, consistent profits based on solid price action any day over some dumb loss based on a hope or a wish. I really want to emphasize this a little later in this post, because I’ve come to some conclusions about the type of approach I need to adopt in order for me to trade in a manner that is consistent with my personality type and so forth. There’s nothing worse than trading based on someone else’s notions and perspective, and basically “losing yourself” in the process. When you’re looking too much at what everyone else is doing, and paying too much attention to everyone else’s reasons for getting into a stock, you find after a while that you’re trading stocks that you wouldn’t even normally touch if you were listening to YOUR voice only. This happened to me too many times during this experiment. In addition, I have found that if I’m trading a stock that starts going against me and I start listening to everyone else’s reasons for why I should be staying in, I end up losing more money than I should because I’m holding on based on some barely-cobbled-together fundamental crap (e.g., management is doing this or that, the company’s new project or product is supposed to be a big hit, etc.). In those types of cases, I’m basically ignoring the price action that’s screaming in my face for the sake of what “might” happen in the future. That, my friends, is just plain dumb.
So in light of these things (especially the lesson regarding SSN), I decided that I would adopt a “take the money and run” approach when the price action was going good, even if it meant “take a small amount of money and run”. I applied this approach to two of my most recent trades in BODY and APP, with profitable results, even if only by a small amount. Here’s the breakdown of what happened:
APP – A Speculator’s Paradise
I’m sure that most of you have heard about the hulabaloo surrounding American Apparel (APP), and specifically surrounding its now-ousted CEO, Dov Charney. Man, did he make a mess of things. Anyway, I traded APP in late April, before all of the doo-doo hit the fan (but has now turned around nicely). APP had spent the first 14 trading days of April in tight accumulation with highs barely peeking over 0.50. I knew something was cooking on 4/21 when it slightly spiked to a new high of 0.5557. I then issued this tweet:
Just judging by the amount of volume inflows, it really seemed like a setup, so I pulled the trigger on 4/22, entering at 0.5930 with 300 shares. It hit a high that same day of 0.6895 but I held on due to it having such a strong close plus very nice volume. Several block buys (some into the six figures) were taking place, so I figured there would be more firepower the next day as well.
On 4/23, APP basically stayed in strong intraday accumulation all trading session long. I published this tweet to summarize my thoughts on the price action:
I was basically convinced, based on the price action on 4/23, that APP had a lot more room left on the upside. Funny thing is, even though I was right, I traded it mostly wrong. APP did indeed spike significantly higher on 4/24, hitting a high of 0.8157, but I exited at 0.70 for some ridiculous reason. I realized that what I had done was decide my exit point based on an earlier entry point that I had envisioned I would get, but didn’t actually get filled at. For whatever reason, I got excited, thinking that I had entered in under 0.55, only to remember later that I had gotten in at 0.5930 instead. I basically lost over 4 cents per share by not having a clear head on the whole thing. I wasn’t convinced that APP would keep its momentum for a fourth day in a row (most penny stocks don’t when they’ve had three consecutively strong days), so I sold out. I also didn’t want to run the risk of holding APP over the weekend, where momentum often slows down big-time. I closed out at 0.70, with a $12.00 profit. Nothing to quit your day job over, but you can’t lose money taking profits. I posted a final tweet about it:
Rounders fans will appreciate the Joey Knish reference–LOL. Looking back on it, I really don’t have any regrets about the APP trade, because my goal with the $500 experiment was to perfect a trading style that fits my personality, and be profitable doing it. I think that I accomplished both of those ends with this trade. I spotted an opportunity, took a risk that carried a high-probability of success, and exited with a proportionally respectable profit (6.7%). No complaints here.
APP has now become a hot item since Dov Charney got the boot amid a disturbing and just plain strange series of scandals. Its last price as of this writing was 1.09. It finally cleared the dollar hurdle, and who knows if it can stay there. My suspicion is that it will take a while to build any more momentum for this one, but what do I know.
BODY Central Corp (BODY) was a quick “in & out in one day” trade for me. On Thursday, April 24th, I had spotted some chatter on Twitter about the stock (especially from Roberto Pedone’s Twitter account). I took a look at the chart, and sure enough–it had all the signs of a decent accumulation with a perk above resistance, along with good volume coming in. Here’s what I tweeted after looking at the chart:
I figured that I had better get in early the next morning, so I managed to snag 200 shares at 1.165 right at the opening bell. I watched Time & Sales closely in my Thinkorswim interface, and for a little while there wasn’t much action, and the stock seemed to hang out in the 1.14-1.15 range. But then, the famous 11:00 a.m. buying session began. I started seeing large block buys firing off, prompting me to post this tweet:
At this point, I knew something was definitely cooking. Any time volume comes rushing in along with a break through a recent resistance point, you’ll more than likely see a good pop in price for that day, or possibly a couple of days. This is many times due to the number of buy stop orders that were sitting above the well-known resistance level being triggered at the same time. This buying momentum can really boost a stock’s price in no time flat (remember BONE?). Well anyway, I actually left the house during the trading session (believe it or not) to go to the library with my wife and daughters. I came back about 3:00 p.m. to find that BODY had popped quite nicely, and was at 1.30 when I got back home. So, knowing that it was a Friday, and knowing how markets can really change their moods over the weekend, and knowing that this was the second day of strong price movement for BODY, and knowing that I was working with an ultra-small account, I decided to go ahead and exit. I got out at 1.29, booking a very small profit, but it was green nonetheless.
BODY just recently got demoted to the OTC; it was on the NASDAQ back when I traded it. As of this writing, it sits at 0.56, so it appears as though I did okay to get out back at 1.29. BODY actually hasn’t seen anything above 1.10 since May 1st, and from the looks of things, it may take a LONG time before it gets back above a dollar. But then again, anything can happen in the penny stock markets.
GPL – A Case of Wrong Timing
My final trade under the $500 experiment was Great Panther Silver (GPL). It had snapped a very important downtrend line on April 29th, which caught my attention later that evening as I was running my screener. I wrote this tweet about it:
I ended up getting in at 1.0699 on April 30th (the day that I injured my doggone self). Now being in absolutely debilitating pain, I really wasn’t too focused on the markets, but I did watch GPL do a couple of cool moves to the upside, but nothing to where I could sell with a profit. Turns out I was simply too early. GPL had some decent upward momentum, but then hit a ceiling at 1.12 and began languishing. Having a VERY small account, I didn’t want to take too many chances, and now that my reasons for being in the stock were basically gone (a short-term momentum-based pop), it was time to adjust and respond. So, I got out at 1.0502, one of the smallest losses I took during this experiment ($23.63). GPL did eventually hit a high of 1.49 earlier this month, but unfortunately I was on the sidelines by then.
So, here’s my completed trading log for this entire experiment:
What Have I Learned?
At the end of it all, my $500 dwindled to only $258.19, roughly half of my starting capital. In case I haven’t made it clear yet, THIS IS NOT THE RESULT YOU WANT. Having lost nearly 50% of what I started with, I knew it was time to pull the plug and begin working to replenish my account. It makes no sense to continue to trade with less and less money, which most of the time causes you to make increasingly worse decisions.
Lemme tell you, this has been one of the most enlightening things I’ve ever done. This experiment has taught me so much about how I view trading, and how different emotions, fears, assumptions, etc., can cloud your judgment and prevent you from trading correctly. I realized that at least half of my losing trades were easily preventable. Many times I would place a trade based on what I THOUGHT the market was GOING to do, versus what it was ACTUALLY CURRENTLY DOING. This is one of the cardinal sins of trading. I think the biggest evidence of this was my very first trade, the FNMA foolishness.
If you’ll notice, whenever most of the stocks I traded moved to the upside, they almost always had a very short-lived boost in price. The speculators and scalpers get their kicks, the market has a quick party, and then the euphoria fades and the stock’s price deflates. A few weeks/months/years later, the cycle repeats. And repeats. And repeats. But hardly EVER will you see a penny stock take off to a new price level and never look back. They almost ALWAYS look back, and GO back.
What I’ve been trying to say is simply this…
It’s ALL bullcrap.
This whole penny stock market, this microcap market, this “stocks under $5.00” market, is little more than a financial carnival, where we ride the rides, have some thrills, maybe win some prizes (i.e., profits), and everything repeats itself all over again the next day. Perhaps the biggest mistake that novice penny stock traders make is actually looking for “value” in these small cap stocks. You have to be in the game for a good while before you realize that the whole penny stock market is a pump-and-dump haven. Sure, some pumps are more overt than others, but let’s be real about it: There are scores of penny stocks that routinely get pushed up into higher price levels, but they inevitably come crashing back down to Pennyland. And the cycle just keeps happening, over and over and over. One of the most famous examples of this in my mind is Century Casinos (CNTY). I’ve watched this stock since I started penny stock trading in 2001, for goodness’ sake. It’s a freakin’ roller coaster, going up and down, up and down, bottoming out between $2-$5 per share, and typically topping out between $8-$12 per share. The stock itself is a casino for those who know what they’re looking at.
What I’m trying to say is that if you’re getting excited because a penny stock you’ve been watching for a while (you know, a stock that has “great fundamentals” and “great management” or a “new product”, or other such insignificant characteristics) all of a sudden has a quick spike in price, you don’t yet understand the nature of the penny stock markets. If you actually think that the stock is going to maintain its blue sky breakout, you’re going to be wrong WAAAAYYYYY more often than you’re going to be right. Truth is, the stock was accumulated by insiders long before it became fashionable, then some superficial “catalyst” was issued into play, causing more attention to be paid to the stock, then a nice run up was made, and then the insiders sold out and left the excited novices holding the bag. (If you doubt what I’m saying, take a look at the entire marijuana OTC stock sector over the first quarter of 2014.) Once the stock begins its inevitable (and fast) decline, you’ll have those same bag-holders complaining about some kind of fundamental issue such as debt levels, or poor management, or other such ancillary details that they somehow neglected to see before they bought into the stock during the “feeding frenzy.” This happens over and over again, every day of every year, and it hasn’t changed at all in the 13 years I’ve been observing and trading the markets.
It is my studied opinion that price action rules the roost. There’s actually nothing else that matters besides price action. Because when someone buys a stock, whether they can put their finger on it or not, what they’re really hoping at the end of the day is that the stock will go up in price. If they short a stock, they’re really just hoping that the stock will go down in price. They’ll mask this intention with all kinds of great-sounding “stock-speak”, but at the end of the day, nobody likes to lose money. And nothing really matters about stock trading except making money. I’m not in this thing for thrills or chills or warm fuzzy feelings. I really just want to make some money. And really making some money boils down to what numbers are flashing on that ticker every day of the trading week. Because you don’t make money when a company introduces an exciting new product, or when they hire a new CEO, or when they win a favorable lawsuit, or when analysts are saying that the stock has “exciting future prospects.” You only make money when the STOCK PRICE MOVES IN YOUR FAVOR. Again, price action is all that matters.
So as for me, I’m going to recognize the game for what it is, and play accordingly. I will have to take some time to work up a $5,000 grubstake (because that’s the amount that I think is truly viable to have a good start in trading penny stocks), but when I do, rest assured I won’t be sitting there listening to a whole bunch of fundamental crap. I’m going to run my screeners, look for favorable chart setups based on reliable price action, I’m going to place my trades, and the moment that the stock STOPS DOING what I want it to do, I’m out. If it does what I want it to do, I stay in. In my mind, there’s no glory nor nobility nor profit in holding on to a losing stock for untold amounts of time, just because it “may” turn around based on some positive future prospects. Yeah, it’s great that XYZ Oil Company is going to dig 10 more wells in 2016, but does that translate into positive price action NOW? Yeah, it’s wonderful that ABC Company is bringing on a new management team, but does the CURRENT PRICE ACTION justify me staying in? If not, I’ll drop the stock so fast, I won’t even remember the ticker symbol by the time my order is filled. It’s time out for hoping, dreaming and wishing. It’s time in for looking at the stock’s price action with an objective eye, and not getting drawn into a stock’s “story”. If I want a story, I’ll go to my daughters’ room and grab one of their books. From now on, price action, and price action ALONE, will guide my trading decisions.
From here, I’m going to begin posting general penny stock trading articles and so forth as I take time to build my account. I wrote many of them several years ago, and they’re full of solid info, especially for beginners. So, I hope you stick around, because I plan on trading this next time around with a freakin’ vengeance.