Tuesday, July 01, 2014

Suffering from a bear raid

Updated: 08 July 2014

Today saw a severe price break on this Spanish stock. As you can see, price fell almost 50% by the end of the day, and at one point price went even lower.

The drop occurred following this story which came out this morning. You can argue about the ethics of things like this, however as you know I pay little attention to fundamentals (or lack of them). Price is everything to me. As it happens, I held a long trade in this stock a few months ago which appeared in my top 10 list of profitable trades over the last twelve months.

This was a brutal price move (unless you were short) and is a classic example of simply getting the hell out of a trade if price starts to go against you in this fashion. Price shocks like this can and do happen. Hence why you should be vigilant on your risk control, and also knowing when to get out of the trade (if your reason for entering has been proven wrong).

Some traders prefer to close trades solely on an end of day basis. This is on the basis that an intra-day price move against you can easily be reversed over the course of the day. Sometimes this can work for you, sometimes it can go against you. You pays your money, you takes your choice. In this particular case, holding on to the end of the day would have led to a significant loss.

In the case of this most recent breakout to the upside a couple of weeks ago, my stop methodology would have triggered an exit within 48 hours of being triggered, as the breakout had failed - it happens a lot. As we know, you can get whipsawed around these levels, which is frustrating. I prefer to eliminate the possibility of a big loss such as what occurred here, and take the small loss and move on, instead of hoping for price to turn back in my favour.

UPDATE: Shortly afterwards, came this: "Gowex, the Spanish Wi-Fi provider, said yesterday it will file for insolvency and its chief executive officer resigned after admitting he reported false financial results for at least the past four years".

In this case, the stories were proven to be true. However, this does not disguise the fact that last year there was a significant uptrend in the stock, before stock started reversing that trend earlier this year. A case of price preceding news?

In a fundamental sense, that is no different to the dot.com bubble where there was significant appreciation in company's share prices despite having little or no earnings. The obvious difference is that, in this case, the company deliberately misled the markets and shareholders with their financial information over the last few years.

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