Trading Psychology – FOMO (Fear of Missing Out)

There are number of ‘Fears’ that a trader will experience in his/her career. The most important three fears that often manifests themselves are: Fearing of Missing Out (FOMO), Fear of Loosing Money (FOLM) and Fear of Being Wrong (FOBW). In this article, I will specifically focus on FOMO, what it is, how it can affect your trading and how to prevent it (as much as you can).

Fear of Missing Out (FOMO):

Fear of Missing Out is a well researched psychology topic that is not only true for trading but also for every day life. Most scams (and well scripted marketing) work due to recipients’ FOMO ‘triggers’.

If you want to understand FOMO better, I strongly suggest reading two research paper by Kernis (2003) and Ellion (2007). They argue that self-determination theory (SDT) a macro-theory of human motivation provides a useful perspective for framing an empirically based understanding of FoMO. According to SDT effective self-regulation and psychological moods are based on the satisfaction of three basic psychological needs:

  • competence – the capacity to effectively act on the world,

  • autonomy – self-authorship or personal initiative, and

  • relatedness – closeness or connectedness with others.

Today’s retail investor is a social animal. We are following each other on social media (twitter, facebook, instagram, etc.) and also bombarded by emails and other media channels. We are being sold ideas and concepts every single minute of the trading hours (and pre-trading and after-hours). What we are really trying to do is to feed the three psychological needs above and/or try to get confirmation (and comparison).

We follow each other, we hear news that this is the must have stock (or the stock that needs to be shorted immediately). We see so many people are doing the same thing and we feel left out (the feeling is: everyone will make big bucks and if I am not doing anything! I will simply loose out on a great trade!) or worse,  in some circumstances, you might be already in the trade but you start doubling your position (just because everyone else is doing the same) and pay the price later. We all know that if everyone is doing the same thing, the trade becomes crowded and thinks start to turn for the worse…

Realization and Action

As traders, we need to realise something very important as early as possible  in our trading career. We simply can’t catch every stock move and we can’t trade stocks every minute of every day. This is a fact! If you can accept this fact then you have ultimately accepted that you will miss some trades (this is perfectly OK!). The real rule to be successful in trading is to have a working strategy. Everyone trades differently, no two traders trade exactly the same way so your strategy will be different then my strategy however there might be similarities that puts us on the same set (i.e. short trader, long trader, momo trader, stock trader, fx trader and so on..). Don’t feel like an outsider or feel being wrong just because you are trading differently to someone else or to a group of people. Don’t forget there is money to be made  in so many different ways from the same stock.

All traders struggle with FOMO time to time. If someone is saying they don’t struggle, they are simply lying to you. Trading experience of course helps with this immensely. My simple rules that help me to stay in check are:

  • The Action Plan: Always have a plan before entering in a trade. Ask yourself what is your edge for entering in this trade. You need to KNOW why you are entering, what size you will be using,  when you will be exiting and what you will do if the trade goes against you. You are not going into this trade just because some guru or a friend thinks it is a good idea. KNOW your trade and KNOW what you want from it EVERY SINGLE TIME YOU TRADE!

  • Be Disciplined: As you now have an action plan, the truth is executing that action plan is more difficult than to have an action plan in the first place. This requires discipline and determination. Don’t forget that HFT algo that you are trading against doesn’t have emotions and will follow rules to the letter. You should try to do the same (as much as you can).

  • Learn to be happy with your achievement: We all want to make a killing from a trade. Reality is trading is extremely difficult. Once you have executed your plan effectively, either you made a profit or a loss. Either way, you have done what was necessary for the trade and successfully filtered out the noise – well done on that. Even though it was a loss, you cut it on time as per your action plan. This is great news. If your trading strategy is profitable, in the long term you will make serious money from trading. As you are following your rules, you WILL be consistent and you will achieve consistency in trading.

I hope this helps. Have a nice weekend.

MT

 

 

 

 

Why I am short KBIO (KaloBios Pharma)

If you are even an amateur trader, you might have heard about KBIO stock back in September where it went from 2.08 to over $5 in 2 days and then back to 1.8s within days…

Now the funny thing is On Saturday 14th November (3 days ago)  Kalabios announced that it would liquidate its assets as it could no longer continue operations with the current cash on hand. In addition, the company stated that they would not be able to obtain the proper funding in the amount of time allotted, to continue with other drugs in the pipeline. The whole downward spiral started with two different trials failed to produce meaningful results.

Also for those who will remember, back in 2014 Kalabios had announced that its Asthma drug, KB003, had failed a phase 2 study. That was a bad setback, but things got worse the next year when the company announced that its phase 2 drug in patients with Cystic Fibrosis had also failed. Both of these failures really hit the company hard but it seemed like it was going to recover with enough pump until this new liquidation announcement.

In short, the lack of money really took this down, as the company chose to liquidate instead of attempt to find funding for the company. Did theytake the easy way out? That’s hard to say for sure, but one thing for sure is that investors have been left holding the bag. The company in charge of this liquidation effort is known as The Brenner Group. They will start the process immidately.

Since the announcement, we are seeing almost a comical move on the stock. Instead of crashing it is actually going up. This is mainly due to pumpers setup a good sub 1 to over 1 play in the last two days and used SSR (short sale restriction)  to their advantage.

What do I expect from this stock? Yes you know it. Back to under $1 in a few sessions or maybe sooner. Started my ss position today and happy to add more if it keeps poping higher. Fundamentals always win at the end.

Have a nice evening.

MT

Update: Since the post KBIO went back to 1.70s level (from 2.40s and I did not cover waiting for lowers) and today AH it went from 2 to cirrently 18s! The news that Martin Shkreli buying shares started a short squeeze wave. I managed to escape with just over -$50K but not to worried because of my AVXL win of nearly 4 times that amount in the previous week. This teaches us NEVER to say NEVER in trading. Anything is possible, anytime!

Introduction to Options Trading – an easy to follow guide

Apart from buying or shorting stocks, there are other ways of trading the underlying securities. A good trader is the one that expands his/her tool set. I will be describing options trading in this article. I will try to keep it as simple as possible so especially the new traders can benefit from it and start using it.

Options Basics

As the name suggest, an ‘option’ is a defined contract that grants the trader to buy or sell an underlying asset at a specific price on or before a certain date.

There are two types of options:

  • Call Option: This is the option to consider if you think the price of the security will be going up.
  • Put Option: This is the option to consider if you think the price of the security will be going down.

Please note that the standard stock options and ETF options expire on the third Friday of the month (hence the volume increase in the markets at this specific date). There are also around 80 stocks in the stock market that their options expire every week on Friday. These are referred as ‘weekly options’.

In options trading, the prices are quoted as per share amount. The minimum contract is always for 100 shares. So in example: if the option price is quoted at $5 the actual cost would be $5 x 100 shares = $500 (not including trading commissions).

Option contract example:

XYZ February 10 Call at $2.20

Lets analyse the option contract above:

XYZ: this is the underlying stook (100 shares / option)

February: this is the expiration month (3rd Friday of the month, the contract will expire)

10: strike (exercise) price – so if the contract is exercised, the price for share you will pay is $10.

Call: this is the type of option. It can be either call (when you long) or put option (when you short). In this example we have a call option (so we are going long) and this enables us to buy the shares at the given price (in this particular example at $10).

2.20: this is the ‘premium’ you will pay to be able to buy this stock at the given price of $10. So the premium you will be paying will be $2.20 x 100 shares = $220 for 100 stocks for this example.

Long call strategy

  • This is a bullish strategy with a expectation of higher price of the stock at the expiration date. So if you buy the stock at $10, the expectation is it will be higher at the expiration date of contract (i.e $13)
  • The good news is with this option contract, your maximum loss is limited to the premium paid for the option contract. That is it.
  • Theoretically the maximum gain is unlimited. So the price of the stock can go higher and higher. In real life, of course there will be a limit on how high the stock will go, but can be a very profitable trace for you (if it goes higher).

Let’s look at another example so everyone gets what I mean above:

Let’s say we are bullish on ABC corp and the stock is trading at $34.50 and we think it will go to $40 within the next 45 days before the expiration of an option contract. So in short, the stock is currently trading at $34.50 and our price target for the stock is $40 (within the next 45 days).

when we look at our trading system, theoretically, we shall see some option pricing listed similar to below:

ABC corp @ 34.50

image

Looking at the prices on our system, in this example, the premium for January $30 call is trading at a high premium, $40 call has no value but the best paying option for going long seems like January $35 call. So I can do the following option trade:

BUY 1 January 35 Call @ 1.25

Now let’s have a quick look at our break even point and profit\loss:image

as it can seen on the table below, any price $35 or below, there is no value in this option contract. The maximum loss will occur is only $1.25 (nothing more). But anything above $35 plus the premium we paid (35 + 1.25 = 36.25 is our breakeven point) is a profit.

The good news about option contracts is, you do not need to wait to sell (or cover) your position until after the expiration is reached. You can buy or sell anytime, if the price is going towards the direction you wanted in the first place then you can have a profitable exit within days (and sometimes even hours).

If you take the example above and reverse (if you are bearish instead of bullish and you think the price will go down) then you can go for the PUT option (instead of call option). The trade mechanics and profit/loss calculations will be identical.

Advantages and disadvantages of options trading

Advantages

  • Leverage: if you are a disciplined trader, you can use the advantage of leveraging with options
  • Risk/reward: depending on the strategy, some option strategy will enable traders to have theoretical unlimited upside with defined and limited  loss
  • Strategy plays: some strategies will allow traders to take advantage of volatility and time decay type of plays
  • Low capital requirements: you can do so much more with $1000 in options then with simply trading stocks with the same amount.

Disadvantages

  • Lower liquidity: very low volumes of trading unless they are very popular underlying stocks. For smaller traders this is not much of a problem if they are only trading 10, 20 option contracts. But if you are trading over 100 contracts then it might be difficult to get out of the trade when you want with low liquidity.
  • Higher spreads / commissions: options tend to have higher spreads because of lack of liquidity as mentioned above. Options commissions are also generally higher than simply trading stocks.
  • Options are not available for all stocks: This is one of the biggest disadvantages. Not all penny stocks have options available to them.

I hope this gives you a good idea of what options are, how to do an option trade and the main benefits & disadvantages of options trading. If you like this and found it useful then please like it or comment on Twitter so I know, and according to that I will have a part 2 write up where I will discuss best option trading strategies and how to benefit from them.

Have a nice Sunday.

MT

If you have finished reading this, you can read PART 2 HERE.

 

Why I am short Anavex Life Sciences Corp (AVXL)

Anavex Life Sciences Corp., a biopharmaceutical company, is currently engaged in the discovery (and in the future maybe development) of drugs for the treatment of Alzheimer’s disease, central nervous system diseases, and pain and various cancers. Its lead drug candidates include ANAVEX 2-73 and ANAVEX PLUS, a combination of ANAVEX 2-73 with donepezil (Aricept), which is in a Phase IIa clinical trial for the treatment of Alzheimer’s disease. The company’s product candidates also include ANAVEX 3-71, a drug candidate that is effective in very small doses against the major Alzheimer’s hallmarks in transgenic (3xTg-AD) mice via sigma-1 receptor activation and M1 muscarinic allosteric modulation; ANAVEX 1-41, a sigma-1 agonist for neuroprotective application; and ANAVEX 1037, ANAVEX 1079, and ANAVEX 1519 for the treatment of pain and various cancers. Anavex Life Sciences Corp. was founded in 2006 and is a US Company (headquarters in New York).

The company currently have ONLY 4 FULL-TIME STAFF. You haven’t read it wrong! It has 30.1M shares outstanding with over 28.5M shares currently floating. With today’s valuation the market cap is over $377 Million (you haven’t read that wrong either!).

Looking at the SEC filing, Mr. Christopher Missling is company’s President and also Chief Executive Officer and also Treasurer and also Company Secretary and also the Director (the man with many talents I guess!)

As a discovery stage pharma it has no revenues and its current EBITD is -$3.78M with net income available to common is -$11.4M. High burn rate with additional funding required in every stage.

One of the biggest criticism against AVXL is the company is using cherry-picked historical study of Aricept as a control biomarker. The data is extremely misleading and will (might) create problem during next phase applications. More on this can be found on the net. The stock promoters are currently doing an excellent job, almost creating a cult-like following. From experience, this never ends well.

The company has just reached an agreement with Lincoln Park Capital Fund, LLC for the sale of up to $50M of common stock over a 36-month period. The company also issued 179,598 shares to Lincoln as a commitment fee. Net proceeds will try to fund the clinical development of ANAVEX 2-73, its potential treatment for Alzheimer’s disease. Lincoln Park Capital Fund is not a stranger fund to AVXL. On 30th December 2010, Lincoln Park Capital Fund invest $1M and then 8th July 2013, Lincoln Park Capital fund once again invested a further $2.6M in a private placement and a $10M further financing commitment. As the company couldn’t deliver the expected results, they haven’t received the further investments. The latest investments is part of their ongoing deal and the company is now giving away more stock then originally agreed in the first place – Lincoln is not a new investor in the park, they are just looking forward to come out of it profitably and with the recent stock prices, they might manage to do this as well.

In the last 4 sessions, the stock managed to climb from 8.75 to almost 12.75 today. This itself doesn’t mean that it needs to come back down but such a climb without supporting fundamentals is simply wrong (at least to me!). I have started my short position at around 12.25 region and added further around 12.50s. I am currently building a short swing position so happy to add more short if the stock ends up with further gains in the short term. However, my expectation is a big red day is imminent sooner than some think…

MT

The magic of Compounding and a few ideas on saving

“Compound interest is the eighth wonder of the world. He who understands it, earns it … he who doesn’t … pays it.” Albert Einstein

You have probably heard the saying: “When you don’t work, your savings will work for you”. There are number of benefits to saving money. In its simplest form some of the benefits can be listed as below:

  • It creates some independene
  • You are not stuck when the rainy days arrive…
  • It allows you to take advantage of good buying opportunities (from cars to properties or businesses – don’t foget cash is king!)
  • You allow for an enjoyable (and perhaps early) retirement
  • It just feels good and reduces your stress levels (the more savings you have, the less financial woories you have).

I’ve always found saving as a neccesity to become wealthy rather than an option. It created incredible opportunities for me to buy things that couldn’t be bought by just levearing. I am currently working (as a volunteer Mentor) with Princess Trust, a UK based charity that helps younger people aged 13-30 to find work or more importantly to start their own enterprises. This could be a very simple business (from a grocery shop to more skilled business such as computer repair shops or website design consultancy, etc.). When I talk to younger people and talk about savings, the number one complaint is almost always the same: “I am not earning enough to save anything.” I don’t normally take this as an excuse and explain to them that every little helps…

Saving $100 a month over five years, based on net interest of 5% a year – if interest on savings accounts return to respectable levels once the recession has abated – mounts up to $6,962.30. Because you earn interest on your interest each year, returns are compounded and therefore better than you might expect. For example, save the same amount over 10 years and your savings rise to $15,848.14! In some parts of the US, you can buy a foreclosure property for this money and start renting it…Not only you will receive the rental but also the property will add value over time as well…which will enable you then leverage to buy more property and hence more rental income. Double whammy! (Rule: money pulls money!). The US Annual personal saving rates can be seen in the graph below:

savings

There is an interesting chart published by Business Insider (below). It emphasizes the impact of compound interest, and the importance of starting early. Saver Emily, represented by the blue line, starts saving the exact same amount as Dave (the red line), but begins 10 years earlier. Ultimately, she contributes around 33% more than Dave over the course of her career, but ends up with almost twice as much wealth as he does! (Rule: Start saving as early as possible!)

Saving compound

Another very interesting chart (that is published by Business Insider again) is how much you need to save to get to $1M at retirement.

savings monthly compound

For all those younger followers out there, I hope this can give you an idea of how important saving can be. There has been never a better time to start saving than now.

I hope it helps.

MT

Why I shorted ZINC – Horsehead Holding Corp.

Horsehead Holding Corp. (ZINC) is the parent company of Horsehead Corporation, producer of specialty zinc and zinc-based products.

Following ZINC for some time but when I saw 2 negative revisions in the past few weeks and its current year earnings consensus has moved lower over the last 30 days, I thought there may be more trouble down the road…

I’ve also expected an offering at some stage (to be honest not this quickly – thought some PR on the way first) but it once again confirms how desperate things have been for ZINC. Yesterday evening (after hours) ZINC announced that it has established an at-the-market (“ATM”) equity program under which the Company may offer and sell, from time to time, shares of its common stock having an aggregate value of up to $50 million through Stifel, Nicolaus & Company, Incorporated, as sales agents….

Apart from the company itself the overall outlook for the Zinc as a material is not great at the moment (hence a stronger short arguement). Zinc metal market prices have been under pressure since September, falling 18%  to a low of $1,981 per tonne (from $2,416). The Zinc is in over-supply at the moment and expect falling prices in the short term. Infra structure projects in China was fuelling Zinc’s growth but as China is slowing down it is more bad news on the horizon for ZINC….

I am not intending to keep my short for a long time, I will cover soon to pay myself and move on before the longs show interest…

ZINC  Capture2

 

Trading IPOs – What to look for

IPO = Initial Public Offering. If the company has never issued shares to the public directly, it is known as an IPO.

I particularly like the IPO plays and made some serious money from them. I own and opeate a Venture Capital business which helped many tech companies in Europe that eventually floated them in the UK’s AIM and also ISDX markets.

So What to look for in a successful IPO:

Timing

Timing of the IPO is everything. If you have a company that sells a fantastic product but currentrly there is no market place for it then that IPO is doomed. We have seen early cloud service provider IPOs with great products that came to nothing because the time was not right. The people were not using cloud services and did not know what cloud actually is. So ‘Timing’ and market acceptance and knowledge is the key to a successful IPO.

Market Leader

Most successful IPO companies are already market leader in their sector. The niche sectors tend to be performing better. If the company is already struggling with the competition and not the market leader or shortly becoming a market leader than it will be a good short after the initial run (if there is any)

Board of Advisors, Agents and Underwriters

The companies with strong board of advisors and IPO agents tend to do better because they know how to sell their offering. Always check who the advisors are and their performance.

Market Conditions

Altough it is not always the case, if the first day of the IPO is on a bad market day, the growth of the stock can be limited. Think about the market psychology…

The First Trading Day – What to look for

The very first day of the IPO is the most raw form of the stock price. There are no historical charts to look for, there are no resistance or support values, there are no short interest (yet) – basically this is when intraday technical analysis becomes most valuable. There are number of important factors that will affect the price on the first day. The most importants are the number of shares offered to the public (float) and the valuation range of the given company. The smaller the float  the more volatile the price will be. This is a simple supply and demand equation. If an IPO is priced relatively conservatively (i.e. below or similar to other companiues from the same sector with the same size), demand could be higher, and vice versa. Based on the actual demand in the marketplace, the IPO price can also be raised or lowered in the days leading up to the offering.

One of the biggest advice I can give you is: ‘NEVER CHASE!’. Only pay for what you think its worth not the other way around.

In the first day trading, I generally look for a range to form after the initial 15-20 minutes. This enables me not to clash with the early investors (the ones that bought pre-IPO and they now might empty the tank!). So after the first 15 min, if the price is holding, it is almost always a very positive sign.

Once we have more data on the charts and range starts to form, I start to use my own technical analysis on 1 minute and 5 minute charts with extreme risk management (expect volatility).

Don’t forget, if you are chasing an IPO just for the sake of it or because of the hype, you might pay big for it. Always have a plan before going into an IPO trade (in fact in any trade) and execute your own plan and don’t let others to decide the price for you.

I hope this helps

MT

For Information: Top Ten Global IPOs (From Investopedia)

1. Alibaba Holdings Group (NYSE:BABA), a diversified online ecommerce company based in China, went public on September 18, 2014 at a whopping $21.8 billion. Four days later, underwriters exercised an option to sell more shares, bringing the total IPO to $25 billion. Although technology companies traditionally list on NASDAQ, Alibaba chose the New York Stock Exchange for its debut and used underwriting primarily from Credit Suisse.

2. ABC Bank, otherwise known as the Agricultural Bank of China (listed on the Shanghai Stock Exchange and the Hong Kong Stock Exchange), is one of China’s five largest banks. ABC Bank went public on July 7, 2010 at an initial offering raising $19.228 billion. The follow-on greenshoe offerings from underwriter Goldman Sachs Asia brought the total to over $22 billion.

3. ICBC Bank, or Industrial and Commercial Bank of China (listed on the Shanghai Stock Exchange and the Hong Kong Stock Exchange), went public on October 20, 2006, fetching a total of $19.092 billion. At that time, ICBC Bank was the largest mainland Chinese bank and the third large Chinese bank to go public.

4. NTT DoCoMo (NYSE:DCM), a Tokyo‑based telecommunications player, went to the public market on October 22, 1998, raising $18.099 billion. Underwritten by Goldman Sachs Asia, this IPO launched NTT to the third largest market cap for a Japanese company.

5. Visa Inc. (NYSE:V) rounds out the top five. This debit and credit card processing company entered the public market on March 18, 2008, and raised $17.864 billion—no small feat during a global financial crisis. It is the largest IPO for any U.S.‑based company.

6. AIA (OTC:AAIGF), a Hong Kong-based investment and insurance company, was offered to the public on October 21, 2010. It raised $17.816 billion and become the third Hong Kong-based financial company on this top 10 IPO list.

7. Enel S.p.A.(OTC:ENLAY) listed on the New York Stock Exchange on November 1, 1999 after it raised $16.452 billion. This Italian company competes in the gas and electric market in Europe and the Americas. It is the only utility company on the top 10 IPO list.

8. Facebook (NASDAQ:FB) was one of the most-hyped IPOs in history. It listed on May 1, 2012 and raised $16.007 billion. This social media technology company’s launch was riddled with trading issues and questionable information-sharing accusations. Nevertheless, it still became the largest technology IPO in U.S. history.

9. General Motors (NYSE:GM) debuted on November 17, 2010 after emerging from a bankruptcy filing one year earlier. This U.S.-based car manufacturer raised $15.774 billion in its initial public offering.

10. Nippon Tel (NYSE:NTT) is a Tokyo-based telecommunication provider. This is the oldest IPO on this list. The company raised $15.301 billion on February 9, 1987.

Read more: Top 10 Largest Global IPOs Of All Time (BABA,V,DCM,FB,GM,NTT,ENLAY,AAIGF) http://www.investopedia.com/articles/investing/011215/top-10-largest-global-ipos-all-time.asp#ixzz3oRwNHv7R
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Can you eat 10 Pizzas at once?

Well maybe you can but most people can’t eat 10 pizzas in one seating. The reason for this is simple, we simply can not ‘digest’ all that food at once. What happens next, we get sick, ‘fall down’ and wait for the paramedics to come and rescue us…

Parabolic stock movements are no different. They can be compared to eating 2, 5 or even 10 pizzas at once. What happens next is quite obvious most of the time. They get ‘stuffed’ and can not digest all that activity. They most likely to start falling as early as mid afternoon session. And the next day they continue to be sick. Amazingly when they recover, they might ask for more Pizza (not uncommon to see the stock to go for half a parabolic move or upwards trend from day 3 or day 4 but eventually fades off again in a week or two).

New traders – Study parabolic moves and specifically study all the charts associated with those moves to get yourself familiar with the given stock, how it behaves, what it likes to do, price action in certain times and what was the reason behind the move itself, etc.

Patience and trade size is the key in these type of plays….think about it before going in to the trade.. What is your plan & what to do if it goes against you and more importantly  when to exit…

So when you see the fat boy on the block next time, you know what to do.

I hope it helps.

MT