I encountered a situation yesterday morning that I'd read about but never really experienced, that of a big price move resulting from a volume burst in a very-low-volume stock. I thought it was pretty interesting and might be of value to other new traders.
Steve A
My SpikeTrade pick for the week is NSTC, has been a relatively low-volume stock, about which I said in my pick sheet comments that watching NSTC was "like watching paint dry". Although most of the time that's been true, on Tuesday morning August 18 I changed my opinion.
We've all read that it's prudent to be wary of low-volume stocks, as price can be moved quickly by a sudden burst of traded shares. As a recent arrival to the world of trading, I hadn't actually experienced this, at least to the degree that I did last Tuesday.
The table shows the minute-by-minute action in NSTC from the open Tue Aug 18 7:30 am through 8:23 am MDT. During this period only a few hundred shares were bought or sold in any given minute, and many minutes went by with no trading at all. From 8:07 to 8:08 100 shares were traded, and from 8:08 to 8:09 another 100 shares were traded. A minute went by, and suddenly between 8:10 and 8:12, a two-minute span, volume rocketed to 54,690 shares.
What happened to price?
The chart shows, bar by bar, the languid activity in NSTC leading up to Bar 21. Prior to this bar there were few buyers and sellers; then suddenly there was a preponderance of buyers, and price took off. The stock rallied from about $5.35 to about $5.75 within two minutes, a rise of 7.5%, on a volume of 54,690 shares!
I had gotten pretty bored watching the inaction on the screen, and at about Bar 19 I went to the kitchen to get a cup of coffee. I returned during Bar 22 and uttered an expletive. It is always a shock when a trading truism that begins as mere words in a book becomes a screaming reality. I hadn't yet entered an order, since the behavior of the market was seeming (to me) so unpredictable and I didn't want to get knocked about, and so I wasn't able to reap the windfall.
So, the lessons that I took away from this are:
(1) Don't take sleepy stocks for granted
(2) Big price movements on low volume really happen
(3) If I had truly wanted to enter, I should have been ready
(4) Because I really didn't want to enter into what I thought would be a risky trade, I shouldn't brood over the missed opportunity, or begrudge the stock its spectacular jump.
Best wishes,
Steve A
Hi Stephen,
ReplyDeleteGood Post! I see you became "over confident" that nothing was going to happen...so you thought you could just sit and watch without making a decision to enter...Low volume stocks are risky in that sense since big price movements on not much volume can really happen- in either direction...Personally I hate low volume stocks!
The only low volume stock I like is maybe a penny stock that is in a base and after extensive fundamental analysis offers an opportunity for an "investment" of high risk funds i.e. something you are willing to lose without much pain.
There was a time I was fully short the market and watching my profits...thinking the market can do nothing to stage a rally (over confident)! Then in the middle of the day Greenspan cut the Funds Rate by 50 basis points and left me with only a 6% loss...I was lucky- that was the mother of all short squeezes that I have ever personally experienced.
Good Trading,
Eric F
Thanks for your comments, Eric!
ReplyDeleteYou're exactly right, I did assume that nothing would happen, or at least happen quickly, and I did use the situation to avoid a decision. What so surprised me was the big volume jump (a couple of institutional orders?) from practically nothing, and how incredibly quickly price changed (although this pales in comparison to the short squeeze you describe).
We seem to need a smack with a two-by-four every now and then. I just hope it doesn't happen too often!
Good trading yourself,
Stephen A
Hello Eric,
ReplyDeleteup to which magnitute you dislike low volume stocks?
Thanks,
Andreas R.
Dear Stephen,
ReplyDeleteThanks for this post. I have started focusing on penny stocks, and seeing these types of moves has shown me that this type of movement is much more common than one might expect. Traders who follow large-cap stocks can become seduced into believing that spikes "rarely" happen and that such occurrences can be disregarded as "fluke." This is simply unfair and unobjective. Just take a few looks at C or AIG and you will think again!
One recommendation I have for you that has helped me enormously is to SET UP A GOOD ALERT SYSTEM. If you're going to trade any stock without one-cancels-another orders, you ABSOLUTELY MUST HAVE an alert system to notify you of sudden volume or price movement. Not having an alert system is an invatation to disaster.
Good luck! I often scan for the types of moves that you described in this post (I use MadScan), and then I can often trade them for a quick 2%+ in a couple minutes- just on the pure momentum and volume. I did this yesterday in CIEN and EDAP. It doesn't always work, but it can. Just be careful, and be prepared.
Hi Mike --
ReplyDeleteThanks for your post - and thanks for your suggestion to use alerts to help monitor the action. How exactly would you use an alert in this case? I would think that by the time higher volume occurred, the price would have moved with it. Is it something else? Thanks.
By the way, I had bought 1400 shares of NSTC yesterday morning, experienced a small gain, and decided to exit. Suddenly it dawned on me - how do I get rid of 1400 shares, when the volume is a few hundred shares per minute? I was going to sell, say, 100 or 200 shares at a time, but I decided to do an experiment. I dumped the 1400 shares all at once, risking of course some slippage (turned out to be small). The effect was immediate - the price dipped markedly. That trade represented 60% of the shares traded in that minute. What power! Scary to think what the big boys could do.
Take care,
Stephen A.
Without a doubt. You have to be extremely careful what you do in stocks that are this thin. Any mistake can wipe out your profits.
ReplyDeleteToday I learned another lesson. I got in 2k shares on the bid on a penny stock with a .10 spread. My goal was 0.08, or $160 profit. However, when I placed my sell order, I accidentally clicked "reserve" rather than "hidden." As soon as my offer posted on the montage, a bunch of chippies joined me on the ask with their peg orders. Dangit! I just showed my hand. I quickly canceled the order and tried to get back in on NSDQ invisible, but it was too late. They smelled blood. Pretty soon the ask had dropped .08 and I was happy to get out free from commissions. Bummer!
Simple mistakes can cost you dearly in unforgiving stocks like these. You have to keep your poker face on and never show your hands unless you're purposefully trying to intimidate. You also need to consider the ECN rebates of your broker, milk them, and be sure that you understand how orders are handled through the different routes. That level 2 montage is critical, and you don't want everyone looking over your shoulder unless you invite them to!
For alerts, your system should be able to alert you on a drop of the bid/ask or a change in bid/ask volume. If not, you can use MadScan as a standalone alert system, but any good broker platform should have that much sophistication. I have alerts set on changes in price, volume spikes, and sudden changes in the inside market.
Happy trading.
Also- I definitely hope that you are using a good level 2 provider, and even using MULTIPLE level 2 providers. I would never trade - ever - any of the stocks I trade without at least two independent level 2 screens. I currently use LightSpeed and RealFastTrader, as their data sources are largely independent from one another, and both offer extensive customization of the montage display.
ReplyDeleteJust as an example- try to get a quote on DHCC. TD Ameritrade says 0.61 X 1.01. RealFastTrader says 0.82 X 1.00. LightSpeed says 0.76 X 1.00. Which is correct?
RealFastTrader.
If you had had only Ameritrade or only LightSpeed, you would have never known about those additional orders. Just goes to show that the more informed you are, the better decisions you can make, and the more chances you have to win.