Fusion Investor Chatbox

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Wednesday, November 14, 2007

Some thoughts on Stop Loss – CBSTECH

I was chatting with "CJLiew" this evening about CBSTECH and after our chat, it prompted me to write this article.

The background is that CJ and a couple of the other people on the chat box have the good fortune of buying CBSTECH when it was rising the last few days, and in his case, he managed to get some at an amazing price of 65.5 sen which is quite near the recent bottom! Anyway, with CBSTECH closing at 92.5 sen, that’s already over 40% return in a rather short time period. (see chart).

Anyway, originally, he was thinking of disposing this at $1. Today’s opening was 89 sen (a 1.5 sen gap up from yesterday’s closing) which was also the low for the day, rose to a high for 94.5 sen, and closed lower at 92 sen. Originally, he asked for my advice whether he should hold out for $1 before disposing all. Personally, he thought it could make $1.10.

Since I don’t own the stock and has not really followed it from a fundamental perspective, I don’t know. He asked me for my TA perspective.

Sometimes, I do give TA commentaries on the chatbox, but I noticed that often it doesn’t always generate feedback, so, I have no idea whether my comments were blindly accepted or ignored. Also, TA skills is really something one should acquire for oneself, rather than continue to rely on someone else. And after a while, it can get tiring to me as well. So, this time, I thought I’d ask questions instead of parroting out my (probably tiring) opinions.

Our conversation (slightly edited for better reading and clarity) went something like this. Note that since this is a popular chatbox with around 170 registered members and several conversations happening at the same time, it is very difficult to follow the conversation. So, for your simplicity, I have extracted them here.

cjliew: btw seng any chance to help me to look at TA outlook on CBS?

Seng: Well, CJ, what's your take on CBS?

cjliew: my take on CBS is there is strong chance it will take out its all time high at RM1.10 … looking the the way cbs is moving for the past 3 days …but my concern is i think there is a very strong resistence at RM1

Seng: What about today's price action for CBS? Sense some weakness?

cjliew: well high was 94 but it closed at 92 so not bad at all … vol wise day 1 was abt 13K, yesterday was abt 23K but today is higher at 33K

Seng: Well, not bad, but not (perfect) too ... especially if you compared to last 5 days – there (last 5 days) the closing was very strong, right?

cjliew: … the highest vol was 146K … tat was when it hit RM1.10 in july … so i m not sure just rely on vol …

Seng: … (that) is a good observation over the last 3 days ... but I wouldn't put too much (i.e. 100%) significance on things that happened a long time ago.

cjliew: ic so u sense cbs is toppish at 94.5? … i was thinking of selling tommorrow at near RM1 … wat do u think?

Seng: Well, to keep it simple, to me, ... today, we just saw the first day of possible weakness. That's a sign to pay attention to.

(It’s natural to) have "hopes" of (the price) repeating or exceeding previous high. But as a trader, you need to put those "hopes" aside (and focus on the price/volume tomorrow). (In particular, …) observe for price weakness. (When you see them,) be prepared to get out or get smaller immediately. E.g. at this stage of the game (with such a strong run-up), I would want to see good volume in the first half tomorrow (or earlier) ... if there isn't it's time to get smaller. Basically, if you sense some uncertainty, it's time to get out or get smaller. you can't pick the top always, but you can get smaller. E.g. what stop loss do you want to set for CBS?

cjliew: well my cost is 65.5 so sitting in a profit position … i just dont want miss the boat loh

Seng: Right, but you want a trailing stop loss which is better. To wait until it fall to 65.5 sen and then sell is too late. You'll be committing a very bad principle of turning your profits into nothing. So, you'll need to raise your stop loss to a higher price.

cjliew: any suggestion?

Seng: Well, what does the charts tell you as a possible support level?

cjliew: i m consider a newbie

Seng: Well, what about today's intra-day charts - does it give you any hint where you should put your stop loss? (the point of asking this question is not that stop loss should be automatically based on intra-day charts, but to get CJ to do the work himself – notice how I consciously didn’t want to give an answer).

cjliew: ok i m not very good at this i think the support shld b at 88 … then follow by 80 ctns … which is the high for the past 2 days …

today's low was 89 and high was 94.5 … so stop loss at 90 ctns?

Seng: CJ, that's fine since there's no single right answer. But there are some answers which are more "obvious" than others. E.g. recent low is one. The other is Moving Average supports. The other is recent highs (that are lower than current price). These are some of the obvious ones.

cjliew: so stop loss at 90 is right? …

sorry seng i m just trying to ride on the gain as high as possible … may b u can share wat shld b the stop loss price?

Seng: As a trader, it is important to keep it confidential to only yourself the exact stop loss level. never make it public, because (price manipulators or) syndicates can (potentially) take advantage of this. But basically, pick a point where it is slightly below obvious levels, or sometimes, above obvious levels (the goal is to vary it so that it is not obvious) . Basically (you have alternatives – e.g. one possible thing ) you could do when the upward momentum is still strong is not to execute your stop loss in full. instead, sell say 50% (or another multiple, which can be up to 100%) at the (first) predetermined stop loss level. This may not be optimum, but should let you ride at least 80%-90% of the upside.

Seng: E.g. if (and it can be a different number), you decide to have a stop loss at say 88 sen, then, when the price hit 88 sen and is going down fast, you put a sell order to sell at 87.5 or even 87 sen for half of what you got. You just must run (execute your first stop loss) at all cost and fast. Then, wait ... if it keeps falling to 80 sen, and let say your 2nd stop loss level is 80 sen, this time, you don't have to execute it hard because you already got half out at 87 sen. The first stop loss is often not negotiable, but in this situation (where you have lots of profits), the second one, you can give a bit of leeway depending on downfall strength (although not encouraged for beginners), because sometimes, manipulators do this to scare off the weak holders. but I don't have a necessarily fixed strategy for stop loss.

E.g. if price falls below 80 sen, this means you got out 50% at 87 sen and 50% at 80 sen, with an average out price of 83.5 sen. You have protected a lot of your gains since your buy is 65.5 sen. It is decent for a stock that makes a rapid decline. And if your first stop is hit but your 2nd isn't, you've bought insurance and can ride the rest up without fear. The key is never turn a profitable position into a losing position. If you can do this, you'd be hands up above a lot of other people.

In other words, by tomorrow morning, you must already know for yourself 2 important numbers (= the 2 stop loss levels). And when you watch the intra-day ticks moving tomorrow morning, it's a chance for you to revise your stop loss levels. Remember, stop loss levels can never be revised downwards, only upwards. … Even if price falls much faster than you can catch, you must execute it to the best of your ability. Else, you'll be in trouble.

Seng: I nearly got into trouble with my Petroch-C1 (recently) .. I made a mistake of giving a bit of leeway to my first stop loss of $1 that Monday morning. but when it fell below that fast, I execute it fast and only managed to get out completely at 95 sen. And that act protected me a lot, as you can see today (51 sen). If you find this skill a useful one in future, then, I hope you use any future profits to make this world a better place for us to live in ...

Another reader commented on this, which is why I am writing this article for future reference.

ks: Seng if u would hv mention abt this stop loss method earlier,I would not hv lose back all my Petro c1 gain sob sob

So, that’s roughly the gist of our conversation. I don’t pretend that I gave the best possible response, as this is just a chit chat sandwiched in between other conversations, and I haven’t really stopped and think critically how I should best phrase my responses as they are off the fly. So, there could be valid criticism to this sort of advice.

Upon writing this, I reflect a few additional things:

1. There is nothing necessarily wrong to sell on strength as CJ originally planned. E.g. the market might give him the chance to sell at $1 tomorrow, and this could be better than 50/50 chance in view of the recent momentum. Perhaps it’s worth mentioning that the risk of course is that if he sells at $1, and it then goes up to an even higher figure, then, he might kick himself for “selling too early”, whereas a properly set stop loss still allows full exposure to further orderly upside and limiting downside risks.

2. But countering 1. is that price rises tend to be more gradual (although CBS price rise in last few days is anything but gradual), whereas price downfall tend to be very quick, so, for someone who can’t monitor every minute during trading hours, maybe it is a better and more practical strategy to just sell some on strength. E.g. take a quarter’s profit (or another number), and leave three-quarter’s on the table to bring the average cost down to well below 62 sen. (Aug 17 close).

3. It is often said that “the first stop loss is often the Best stop loss”. So, someone might argue that my advice to sell half on the first stop loss and another half on the 2nd stop loss might not be efficient. That’s true, and I won’t debate which is better since this is an individual decision. If we all have the same decision, then, the price manipulators can easily manipulate the market. Let’s make his job a little bit more difficult …

4. I suspect many CBS players will be "hoping" for a repeat of 9 Jul where volume topped 14.6 million and the price rides to a wonderful $1.10. That’s a natural hope - it could happen, and $1.10 could even be exceeded. But let's not kid ourselves. At the time of writing, all this is is just "hope". And in serious trading, “hope” really has no place during trading hours. During trading hours, never be stubborn and cling to “hope” when the price action shows otherwise (even when volume action shows a repeat). Always listen to Mr Market, and never try to argue with him.

5. During trading hours tomorrow, please don't ask me whether it is time to execute stop loss - you won't have the time.

6. Remember that all numbers mentioned here are simply hypothetical. You must assume the price manipulators exist, and have read this article, and not only that, but have already planned what to do in this coming days when it comes to distribution time. So, keep your stop loss and your plans confidential. I would prefer if the chatters would not adopt the alternative strategy of confusing readers in the hope of confusing the price manipulators, since this latter strategy have the effect of misleading innocent readers.

Anyway, I personally don’t have any position in CBS (which is why I can write this article with full conscience). As usual, trade (buy, hold, sell) at your own risks.

Happy Trading and don’t forget your stop loss!

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