WNDW – Why I am short (SolarWindow Technologies)

Who are SolarWindow Technologies Inc.?

If you are around long enough, you would know that SolarWindow used to be called New Energy Technologies and traded with the ticker NENE.

The company has absolutely ZERO revenues, employs only 3 people with 26.3M shares outstanding (10.3M shares currently floating) with zero institutional holdings and 44% insider holdings.

With the current price ($3.24), the company has over $85M market cap! You haven’t read it wrong…

Checking their filings, the company is currently in a complete financial mess. As Penny Stock Realist, a respected Seeking Alpha contributor, recently pointed out that, their latest 10-Q filing includes the following admission from the company:

“The Company does not have any commercialized products and has not generated any revenue since inception. The Company has an accumulated deficit of $27.290,828 as of May 31, 2015 and does not have positive cash flow from operating activities.

As of May 31, 2015 the Company had cash of $69.169. Subsequent to its quarter end, the Company received $765,156 from the exercise of Series H Warrants. Based upon its current and near term anticipated level of operations and expenditures, the Company believes that cash on hand should be sufficient to enable it to continue operations through October, 2015.”

Why WNDW price is going up lately?

WNDW is currently involved in a Paid Promotion. This simply means that company is paying some stock media company to produce exciting (and not necessarily correct) promotion material online (and in some cases offline) to get unsuspected investors to invest in their ‘very innovative’ electricity-generating SolarWindow coatings product which will produce ‘Endless Energy’. You don’t need to be Einstein to laugh at this statement.

They also created this webcast ‘announcement day’, which will take place on  20th August. This is a quite well known trick to get potential investors excited as if there is great, big news are on the way…

Companies pay for paid promotions when they are desperate and it hardly ever ends well for the unsuspected investors as it is normally a trick for the insiders to sell their stock to these investors at ultra inflated prices.

The company has over 8 million shares of common stock issuable from warrants and with absolutely no revenue the company will want to raise money and will use these warrants very soon. What do you think will happen to the stock price then?

Solar Sector and Real Innovations

As well as stock trading, I also own and operate a very successful Venture Capital organization in Europe which helped hundreds of Small to Medium Enterprises (SMEs) to raise seed or commercialization finance. Solar Sector happens to be one of the areas that we had helped many companies in this domain and have quite a good overview on the latest innovations and trends in the sector.

The technology that WNDW claiming to be working on is not in any way new or innovative. Spray-on-Solar technology as a coating is almost 20 years old technology. Although, It is true that more applications areas has been created for the technology in the last 5 years or so, the technology itself is being protected with concrete Intellectual Properties such as patents from very big companies in the sector.

SolarWindow has filed a patent in 2012 (which is still pending and can be seen here: https://www.google.co.uk/patents/US20140198371?dq=%22solarwindow%22&hl=en&sa=X&ved=0CCAQ6AEwAGoVChMIoL-1w42pxwIVi6HbCh12aw4l). The patent is very general in terms of its explanation of the invention and pretty much similar to some other patents out there. It is very unlikely that it will be ever granted (patents pending means absolutely nothing, it means that it has been filed and awaiting decision from the patent office but companies love to mention those as if they have some great technology).

Photovoltaic (PV) systems can be classified as ground-based (stand-alone systems e.g. solar farms), building-applied (BAPV) (e.g. roof mounted panels), and building-integrated (BIPV) (where PV is integrated with building function e.g roof tiles, skylights). The majority of solar PV systems in use today employ solid, flat-panel PV modules, with the PV material encapsulated in glass.

For fabric-integrated and glass-integrated  PV, lightweight and flexible thin-film PV modules are required. The alternative technologies suited to flexible PV manufacture include amorphous Si (a-Si), Copper Indium Gallium diSelenide (CIGS), Dye-Sensitized Solar Cell (DSSC) and Organic Photovoltaics (OPV).

Current State of the art and the companies in the sector (with concrete Intellectual Poperties can be seen as below):

FLEXIBLE/Integrated PV

aSi

CIGS/CIS

DSSC

OPV

Major Manufacturers

Unisolar

Ascent Solar, Nanosolar,

Solopower

Miasole

Dyesol

Sony

G24i

Konarka

Solarmer (R&D)

European manufacturers

Flexcell

Flisom AG

PVflex Solar

CIS Solartechnik

Odersun

Solarion

G24i

Dyesol UK

3G Solar

SolarPrint

Konarka

Heliatek (R&D)

Cell Efficiency [%]

5-8% product

7-11% product

18% R&D

<10% product

<5% product

8% R&D

Lifetime [yrs]

25 years expected

10+ years expected

Poor outdoor (UV) lifetime

Typ. 100 hrs.

Not fully proven

80% degradtion over 3 year claimed

Maturity

Mature

Emerging products

Prototypes

Emerging products

Please note that, the efficiency of flexible thin-film or printable PV technologies (that WNDW are claiming to use)  is lower than the solid panels (crystalline silicon cell solar modules have efficiencies up to 24%, and are typically <18%). This means that efficiencies are very low, return on investment on them are typically many years for big applications. It is very unlikley that any of the construction companies will be interested in purchasing WNDW products and use them in their buildings or skyscrapers (as claimed by he company).

Looking at the information above, knowing about this company history (when they were NENE), knowing about the technology domain, WNDW is a STRONG SELL\SHORT for me. I currently hold a large short position and adding more before the big crash.

I hope this helps.

MT

 

 

 

 

The Story of the Fisherman (and being ‘selective’ in your trading)

One of my favorite short stories and this story has been shared many times on the net, I am sharing Courtney Calver’s version here:

“An American investment banker was at the pier of a small coastal Mexican village when a small boat with just one fisherman docked.  Inside the small boat were several large yellowfin tuna.  The American complimented the Mexican on the quality of his fish and asked how long it took to catch them.

The Mexican replied, “only a little while. The American then asked why didn’t he stay out longer and catch more fish? The Mexican said he had enough to support his family’s immediate needs. The American then asked, “but what do you do with the rest of your time?”

The Mexican fisherman said, “I sleep late, fish a little, play with my children, take siestas with my wife, Maria, stroll into the village each evening where I sip wine, and play guitar with my amigos.  I have a full and busy life.” The American scoffed, “I am a Harvard MBA and could help you. You should spend more time fishing and with the proceeds, buy a bigger boat. With the proceeds from the bigger boat, you could buy several boats, eventually you would have a fleet of fishing boats. Instead of selling your catch to a middleman you would sell directly to the processor, eventually opening your own cannery. You would control the product, processing, and distribution. You would need to leave this small coastal fishing village and move to Mexico City, then LA and eventually New York City, where you will run your expanding enterprise.”

The Mexican fisherman asked, “But, how long will this all take?”

To which the American replied, “15 – 20 years.”

“But what then?” Asked the Mexican.

The American laughed and said, “That’s the best part.  When the time is right you would announce an IPO and sell your company stock to the public and become very rich, you would make millions!”

“Millions – then what?”

The American said, “Then you would retire.  Move to a small coastal fishing village where you would sleep late, fish a little, play with your kids, take siestas with your wife, stroll to the village in the evenings where you could sip wine and play your guitar with your amigos.”

The Mexican Fisherman smiled and thought, “isn’t that what I already do?”.

As the Mexican Fisherman demonstrated you can have more with less, in trading we should find a way to maximise gains with the least amount of risk and work. We should let the trade work for us (not the other way around).  This means being very ‘selective’. Easier said than done. I add quite a few tickers on my daily watchlists but most days I only try to heavily focus on 3 or 4 tickers at a time (sometimes these trades are only day trades, sometimes a few day swings). In my opinion, this enables taking advantage of  less risky trades (better risk/reward ratio compared to some other trades out there), consistency and selectivity. Think about it before the next trading session…

I hope this helps.

MT

 

 

A simple strategy for your trading toolset: After Hours Trading (AHT)

After Hour Trading (AHT) is one of those mystical (if not scary) words that most day traders will equate to gambling. However, there are (growing) number of players in AHT including human traders and algos.

You can see that  AHT volume in specific stocks often surges upon the occurrence of market-moving events, such as earnings reports, pre-earnings announcements or M&A activity or sector specific news (such as shipping rate changes, etc.)

Let me make this clear, I do not do too much AHT trading however, I certainly do quite a few trades (mostly successful ones) during earnings seasons. I specifically like after hours earning announcements and I listen to their conference calls however most companies publish their results just before the conference calls on their websites (or file a SEC report before the call).

My AHT trading strategy is extremely simple. I only play longs for positive earnings. I also like the stocks which generally have a good volume day time (the same day as the earnings announcement). After the positive earnings have been announced the price of the stock generally spikes (I call this the first wave) and then it normalizes (generally within a few minutes). This is when I buy it. It is then very likely to spike once again (I call this the second wave) when more people hear or read about the earnings news. Generally it can take about 15-20min between first and second wave (can be longer or shorter). I then sell my positions near first wave highs and call it a trade! I don’t like keeping it overnight (nothing wrong with doing so) but I find it risky. If I play, make money and get out, that is the way I like it.

Please note, I go for a LONG play ONLY if the earnings beat the estimate at least with 10% or more. If not, I simply leave the stock alone and don’t go for a trade. I am extremely selective with AHT trades – the way it should be. Finding the stocks to fit with the above criteria could be somewhat challenging (and time wasting) but it is better to waste your time then your money!

Please note, after-hours trading is busiest in the first hour or two after markets close, before disappearing sharply. As financial markets become increasingly integrated with the advent of globalization, I expect the after-hours trading is likely to expand going forward. Watch this space.

I hope it helps.

MT

PS: Zacks is a very good source that I use to see earnings calendar, estimates, etc. There are tons of other free websites where you can find all earnings related information.

Trading Tip: SEC FILINGS – THE FORMS THAT YOU SHOULD KNOW AS A TRADER

SEC filings are stored electronically in EDGAR Database. You can reach it here: http://www.sec.gov/edgar/searchedgar/companysearch.html

There are so many forms out there. Most new traders are completely confused on which form to open or what to look for. Here is a quick summary of what I find the most important SEC filings that traders can check before investment and/or trading decisions:

10-K Report

This is a comprehensive report that summarises of a company’s performance that must be submitted annually to the SEC. Typically, the 10-K contains much more detail than the annual report. It includes information such as company history, organizational structure, equity, holdings, earnings per share, subsidiaries, etc.

The important bits to focus are:

– The management discussion and analysis (MD&A) section provides a good explanation of the company’s operations and finances. It is important to read this bit to understand the financial outlook of the particular company. The important places ot check are: the balance sheet, the income statement and the cash flow statement.

– ‘Other sections’ discuss the company’s management team and legal proceedings. This is another important place to look for to see the management changes, any legal problems, etc.

10-Q Report

A truncated version of the 10-K is the 10-Q report. Instead of annually, this report needs to be filed within 45 days of the end of each of the first three quarters of the company’s fiscal year. It details the company’s latest developments (which is very important to most investors) and provides a preview of the direction it plans to take. Major differences from the 10-K include unaudited financial statements and less detailed reports. These unaudited financial statements are important to you as stock pumpers (or dumpers) will normally use this information. General rule says that if the stock is a pump&dump stock and 10Q info has been used in the past, it is very likely that it will be used again. This might give you an edge…Companies will also release a press release to use the info found in 10Q on the same day as the reporting day or within a few days.

8-K Report

This is an unscheduled document. It addresses specific events and provides further detail and exhibits, such as data tables and press releases, etc. If the share price is diving, expect a 8K report from the company to show something positive.

The really important events for 8K are: a  bankruptcy or receivership information, material impairments, completion of acquisition or disposition of assets, departures or appointments of executives which are important to investors and traders.

Proxy Statement

This is one of my favorites. In the proxy statements, you can view management’s salaries, any conflicts of interest that might exist and other perks received. It’s always presented prior to the company shareholder meeting and must be filed with the SEC before the shareholder votes on the election of directors and approval of other corporate actions. The imoirtant forms within proxy statement are:

– Form 3, the initial filing, tells the ownership amounts

– Form 4 identifies the changes in ownership.

– Form 5 is an annual summary of Form 4 and includes any information that should have been reported.

Schedule 13D

The Schedule 13D form basically reports who owns most of the company’s shares and also introduces the owner (or owners) to investors and provides contact information. It’s filed within 10 days of any entity acquiring 5% or more of any class of a company’s securities. It provides the following information:

  • Background information on the owner, including any criminal misbehavior, and the type of relationship this owner has with the company
  • An explanation of why the transaction is taking place
  • The type and class of the security
  • Where the money is coming from for the purchase

Most stock researchers and analysts keeps an eye on Schedule 13D to see the ownership information and the information on the owners. If the owners have precious SEC warnings or prosecutions, it is likely that the stock will be a pump & dump stock and will receive a negative article from SeekingAlpha, Muddy Waters or similar which can affect the price immensely.

I hope this helps.

MT

Stock Trading – Top 10 Tips for the New Stock Trader

1) Trading Style: Everyone is different. We all do the same things, waking up, going to toilet, have a shower, eat breakfast, go to work, etc…But everyone is doing this in a different way. Trading is no different. Trading is buying and selling stocks but the way we do it differs. Everyone’s trading style is unique. I strongly suggest the new comer to give a good thought on this. What type of trader do you want to become. Can you spend hours in front of the computer, or do you have to work and perhaps check it once or twice a day? It is always to have a good idea of what kind of trader you will be (day trader, swing trader, long term, short term, etc.) BEFORE you start trading with real money. The good thing is, you can always change your mind or adapt to a different style that suits you later on…

2) A Realistic Expectation from trading: When traders first start trading, they are generally attracted to trading from a website or documentary they watched. They have seen these successful traders making a killing! How difficult can it be to buy or sell a stock and make a mint! The answer: VERY Difficult! In fact, 95% of the traders loose all their money or left trading before loosing everything. Put it this way, if I told you to give me $25K of your hard earned money and tell you there is 95% chance that you will never see that money again, would you give that to me? Think about that for a second. That is what market is telling you! I strongly suggest to have realistic expectations from your trading and only use money that you can afford to loose!

3) Select A Good Broker that can match your trading style: There are numerous brokers out there. Some are great for shorting and there are some others with low brokerage fees, etc. Do your homework, compare the brokers and choose the one that matches your trading style. Once again, if they don’t deliver, you can always switch to a new broker.

4) Try to find a ‘Low-Risk High-Reward’ Trading Method: Stock trading is a very risky business. No method is 100% risk free, otherwise all of us traders would be billionaires! For example. choosing stocks with good news, good momentum, good historical trend and positive ratings (for long trading) could be a relatively less risky way to start your journey…

5) Find a flexible trading method: Will your method work in most market conditions? Unfortunately, the stock market doesn’t just go up or down. Sometimes it might go sideways for days, too. Consider these factors while deciding on your stock trading method(s). If your method is working only in bull or bear market, then you won’t last long…

6) Trade The Best Stocks Available: Easier said then done! Finding the BEST stocks takes advanced skills and experience. If you are a day trader then the best stocks will be high volume / momentum stocks. If you are a swing trader, you need to be able to see the swing patterns and accordingly. If you are a member of a stock trading community, it would be a good idea to follow the daily recommendations to start with but make sure to understand how they select their stocks, what tools they use, etc. If you don’t want to pay for a service, there are so many people on twitter posting their watch-lists daily. Find the traders that match with your trading style and start following them. Try to understand why they choose those stocks in their watch-list, etc. Ask them questions, most will be happy to help (however, avoid asking questions during stock trading hours).

7) Know When To Exit: From what I see, most new comers focuses on what and when to buy (or short) a stock, yet few ever consider the best time to exit. Paper profits only become real money when you convert them to cash. Know when to exit!

8) Educate Yourself: A “winning edge” consists of the favorable factors that set winners apart from losers. You must have a reliable advantage to consistently make money trading. The first thing I suggest you do is to familiarize yourself with all the available trading tools. There is ton of information on the web (for FREE) where you can learn simple trading methodologies, how to use free tools (such as FinViz etc). The more you have in your toolbox, the better trader you will become.

9) Cut Your Losses Quickly: If there is only one tip that I can give you, this is it! We have all been there, done that. Hoping and praying that a bad trade will turn into a good one. Some traders even add to their losses and make the already awful trades into a disastrous ones. CUT YOUR LOSSES QUICKLY! I can not stress this enough. Probably this will become one of the most difficult things to do, however, ALL consistent traders have learned this and use this tip daily – that is why we are still in the game.

10) Learn to Smell the Bullshit from a mile away: There are so many wonderful people in the online trading community BUT unfortunately there are number of people out there who are simply scam artists and/or Fake Gurus (FURUs). If something seems too good to be true, then it probably is. Try not to pay for FURU services / alert services or ‘tools’ that will make you a millionaire overnight! Question everyone and everything in the trading market before purchasing anything. Don’t be a SHEEP, be a WOLF.

Good luck!

MT

The reasons why I like Alarm.com Stock (ALRM)

Alarm.com Holdings, Inc is a platform solution for the connected home. The company through its cloud-based services, makes connected home tech accessible to millions of home and business owners.

The company provides 4 primary solutions to its customers:

– Interactive Security (i.e. Alarm systems, etc)
– Intelligent Automation (eg.controlling household systems remotely)
– Video Monitoring (i.e. intelligent video monitoring and event capture technologies)
– Energy Management (i.e. temperature, solar panels, air conditioning)

The company is also engaged in the design and manufacturing of various types of hardware, including cellular communication modules, image sensor, video cams and smart thermostats.

In both 2013 and 2014, the company posted profits. These were relatively thin ($122,000 on $130 million in revenue and $563,000 on $167 million, respectively), but they were profits nonetheless.

That 2014 revenue figure, by the way, represents nearly 30% growth over the prior year. The company is growing rapidly.

So far, 2015 also seems to be shaping up profitably for the company with continued revenue growth. The first quarter saw a top line of $46 million and a net profit of $146,000, compared to $37 million and $148,000 for the year-ago quarter. This is also healthy news…

Alarm.com had $19 million in long-term obligations as of the most recent quarter but over twice that amount in cash and equivalents. Interest expense only came in at $42,000 during the quarter, indicating that servicing these borrowings is currently a non-issue.

The majority shareholders are ABS Capital Partners & Technology Crossover Ventures.

The Market:

Alarm.com is operating at “Internet of Things” or IoT market. This is a rapid growing market sector. IoT is in its simplest form is the network of physical objects or “things” embedded with electronics, software, sensors, and connectivity to enable it to achieve greater value and service by exchanging data with the manufacturer, operator and/or other connected devices.

 

IoTIn Energy Management market, IoT devices is expected to be integrated into all forms of energy consuming devices (switches, power outlets, bulbs, televisions, etc.) and be able to communicate with the utility supply company in order to effectively balance power generation and energy usage. There are number of national and international standards pushing exactly for this. Such devices would also offer the opportunity for users to remotely control their devices, or centrally manage them via a cloud based interface (just like Alarm.com’s cloud based system), and enable advanced functions like scheduling (e.g., remotely powering on or off heating systems, controlling ovens, changing lighting conditions etc. which most of these functions are already available from Alarm.com).

In Building and Home Automation, IoT devices can be used to monitor and control the mechanical, electrical and electronic systems used in various types of buildings (e.g., public and private, industrial, institutions, or residential). Home automation systems, like other building automation systems, are typically used to control lighting, heating, ventilation, air conditioning, appliances, communication systems, entertainment and home security devices to improve convenience, comfort, energy efficiency, and security.

Home automation and home security is also a major step forward when it comes to applying IoT. All these advances add to the the numerous list of IoT applications. Now with IoT, you can control the electrical devices installed in your house while you are sorting out your files in office. Your water will be warm as soon as you get up in the morning for the shower. All credit goes to smart devices which make up the smart home. Everything connected with the help of Internet.Alarm.com is already providing some of this functionality.

One would expect Alarm.com to become the defacto name for Home Automation and security within IoT spectrum. They have the early mover advantage and fast becoming a very well known name in this sector. With the recent IPO, it will become more of a brand rather just a company name.

All things said, I expect Alarm.com to grow rapidly from here. They already have a good management system and a good financial support network. It is a short term and also longer term BUY from me at the moment.

More info on their products and services (and some multimedia presentations) can be found here: https://www.alarm.com/productservices/interactive_security.aspx

Bio Stocks – What does Orphan Drug Designation Mean?

From some of the questions I got in the last few days (re: GERN), there is quite a bit of misunderstanding what actually Orphan drug designation means.

Orphan drug designation means that the sponsor qualifies for certain benefits, such as reduced taxes, from the federal government. It does not mean the drug is safe and effective and legal to manufacture and market in the United States.

Getting qualified for Orphan drug designation is of course a positive think but it is merely a tick box in a document. It also enables the company to have some tax incentives as mentioned above and is meant to encourage pharmaceutical companies to develop drugs for diseases that have a small market. Under the law, companies that develop such a drug (a drug for a disorder affecting fewer than 200,000 people in the United States) may sell it without competition for seven years, and may get clinical trial tax incentives.

Most of the stock pumpers use this as a pump as if the drug is almost approved by the FDA, and push unsuspected traders into a trap. I have seen this quite a few times lately and the last one being GERN last week. Beware of the pumpers and do your own research to any stock!

Just to give you an idea, currently there are more than 400 orphan designated drugs in clinical trial process. Majority of these drugs are being developed in the US followed by Europe. The US dominate the development of orphan drugs with more than 300 orphan designated drugs being under clinical trial process. Most of these will be unsuccessful and will never make it to your pharmacy.

 

Understanding Level 2 Data and How to use it

I’ve received a few questions from the followers regarding Level 2 data. Level II market data is available from your broker. Generally it comes as a subscription service (and sometimes free if you are trading above a certain amount of trades each month, etc).

Level 2 has been used by sophisticated market traders. It contains full depth of the market by listing the ‘BUY’ and ‘SELL’ orders in a particular stock. It is a real-time service meaning that all the displayed orders are awaiting to be executed or being executed. It provides traders how a stock price is derived and its potential future direction.

OK – Tell me what kind of information I can get from a Level II?

Market Depth: This indicates where the market is in terms of buyers and seller. On the buy side (orders to buy the stock), calculated by adding up the total number of orders to buy stock at each price level. On the sell side, we look at the total number of orders to sell the stock

Liquidity: This is the measure for the total number of buy and sell orders in the market and how fast they are replenished. Companies with large market capitalization (the market cap) generally have better liquidity in their stock. Always check the market cap if you are unfamiliar with the stock and planning to trade it!

Order Timing: Level  II market data helps the trader to see the full liquidity hence it can help the trader to determine the best time to place the order

Bid Offer Spread: This is basically the difference between the bid (the price at which you can sell the stock) and offer (the price at which you can buy it). By watching Level 2 data, it shows you the average spread between the bid and offer. This gives you the opportunity of seeing all the current orders in the market and can help indicate when the bid offer spread widen or change as orders get filled. This generally offers the opportunity of trading at a better price if spread is moving in a favourable direction. Typically, you will see that the larger cap stocks have tighter bid offer spreads than smaller cap ones. Tighter spreads of course mean that you will reduce the dealing costs as well.
level2

Typical Level 2 Screen

OK now you now about the Level 2, lets move into another very important one. I always use Level 2 data in conjunction with ‘Times and Sales’ data (which is also from your broker, if you can’t see it, ask your broker to provide it for you). This enables you to look at the relationship between large executed orders and subsequent moves in a stock price and depth of market.

Level 2 data can show you if the breakout is real or false. You can see if there are enough bids or offers to follow after the breakout number.

If you are using Interactive Brokers (IB) and also in some other trading software, you have probably seen the ‘Iceberg orders’. These are in short the ‘hidden orders’. So if you would like to buy 5,000 stocks, most traders use ‘Iceberg’ function and show the number they want to display on level 2 (i.e. 200 shares). An iceberg order is a large single order managed by an exchange that has been divided into equal quantitites by the use of an automated program, for the purpose of hiding actual order quantitiy. This can basically hold back the stock price at a specific level as the full extent of the order gets executed.

The most important information Level 2 gives me is perhaps understanding supply and demand characteristics, I can identify (at least try to!) intraday shifts in momentum from strong buying to strong selling. This can be seen rapid shifts from the left to the right side of the order book or vice versa.

IF you are not already using ‘Level 2’ and ‘Time and Sales’ screens, I strongly suggest start to look at these during trading hours and familiarize yourself. You can get so much information from this that I can watch this screen and the numbers for hours with joy!

Volume Weighted Average Price (VWAP) – Observations

Generally used by pro traders, VWAP is a measure determining at which levels the most volume is being traded. In other words, taking every trade and summing up the product of all shares that trade at the price they trade and then dividing by the total number of shares. As it is a valuable information, it generally becomes a magnet for price, often reverting to VWAP level after a strong move away from it.

It is simply the benchmark quality in the trading world. Day traders may track VWAP because this calculation is very significant to the trading of many mutual funds and most pension funds.  When the current intra-day price varies significantly from the VWAP, there may be pressure for the price to move towards the VWAP.

From a practical standpoint, to get an efficient VWAP caluclation, you want to do it on the shortest timeframe possible because otherwise you will lose resolution. In my opinion, it is good to have three versions of VWAP available during the day, such as: 1) a number published by my data provider 2) one I calculate on one minute bars and 3) the one I calculate on five-minute bars. I see that the #1 and #2 are usually exactly the same, though they can differ in the morning. Number three may be significantly different, so just beware of this if you choose to calculate the number yourself. I would tend to ignore VWAPs you calculate on 10 minute or higher bars…

Let’s have a quick look at Amazon VWAP self explanatory example below:

vwap

So looking at the chart above. if a stock is chopping back and forth on both sides of VWAP, obviously VWAP is not really significant so I can safely ignore it. However, if I look at the chart of AMZN above and note that there was selling at VWAP each time price touched and then finally those sellers lost the battle and the character of the stock was completely different. There are many different ways of using this information, but if you were short and pressing shorts, the momentum through VWAP should have warned you that you were fighting on the side of the losing army…It is always good to check VWAP before enter a trade.

If we want to talk about the limitations of VWAP, unlike a moving average, which is commonly used in the development of trading strategies, the VWAP is more of an analysis tool than a trade signal tool. It provides a basic guide for whether there’s an upward or downward bias in price, but the actual VWAP line isn’t likely to provide consistently good trade signals. This is mainly because during strong trending moves the price is unlikely to touch (or even come close to) the VWAP.

Later in the trading day, the “lag” in VWAP becomes significant. This is because so much data is already being computed into the calculation that new data points have very little effect. Therefore, VWAP is of more value at the start of day to retail traders because it is more responsive to price moves. On the flip side, at the end of the day the VWAP will flatten out and be of little use to the retail trader. The end of day VWAP values are more important to the institutional trader though, since the end of the day VWAP value gives a benchmark that the institution can compare their transactions to.

Your trading platform should provide VWAP indicator to you, if not ask them to do so. I know for a fact, Interactive Brokers only provides it as a number unless you ask them to add it to the chart display (via API).

WHAT IS PAIRS TRADING (STATISTICAL ARBITRAGE)

Let’s Start

Don’t worry about the buzzwords in finance. Statistical arbitrage is basically pairs trading. Pairs trading, in its simplest form is buying or selling a pair of stocks based on its relationship to each other.

Often, two stocks in the same business domain are ‘synched’ – meaning that their price patterns follow each other. Sometimes they come out of the sync and that is when a statistical arbitrage opportunity appears to make some serious profits.

The good thing about pairs trading is, it is market neutral, meaning that it is not depended on the market move but the relationship of the two paired stocks only. This means that you could potentially make good profits whatever the market conditions are at a given time.

The relationship between the two stocks can be described by the ‘correlation coefficient’ which is basically the strength of relationship between a dependant variable and an Independend variable.

  • Perfect negative correlation (-1) exists when the two securities move in opposite directions (i.e., stock A moves up while stock B moves down);
  • Perfect positive correlation (+1) exists if the two securities move in perfect unison (i.e., stock A and stock B move up and down at the same time); and
  • No correlation (0) exists if the price movements are completely random (stock A and stock B go up and down randomly).

An example can be given as follows (copyright of Pairtrade Finder Software):

In this example you see the price relationship between KO and PEP and the areas of interest for pair trading.

Pepsi (PEP) and Coca Cola (KO) are different companies that create a similar product, soda pop. Historically, the two companies have shared similar dips and highs, depending on the soda pop market. If the price of Coca Cola were to go up a significant amount while Pepsi stayed the same, a pairs trader would buy Pepsi stock and sell Coca Cola stock, assuming that the two companies would later return to their historical balance point. If the price of Pepsi rose to close that gap in price, the trader would make money on the Pepsi stock, while if the price of Coca Cola fell, he would make money on having shorted the Coca Cola stock.

Pair Trade

The dog and the owner

Murray (1994 – American Scientific) has given an excellent example in his research paper regarding pairs trading.

Suppose you see two drunk people (i.e., two random walks) wandering around. The drunks don’t know each other (they’re independent), so there’s no meaningful relationship between their paths.

But suppose instead you have a drunk walking with his/her dog. This time there is a connection. What’s the nature of this connection? Notice that although each path individually is still an unpredictable random walk, given the location of one of the drunk or dog, we have a pretty good idea of where the other is; that is, the distance between the two is fairly predictable. (For example, if the dog wanders too far away from his owner, she’ll tend to move in his direction to avoid losing him, so the two stay close together despite a tendency to wander around on their own.) We describe this relationship by saying that the drunk and her dog form a cointegrating pair and we can scientifically calculate the correlation coefficient.

OK I got it! Show me how can I start using this technique?

All good in theory so how do we use in practice. Well I am working on this and paper trading on number of stocks for about 6 month or so. The results are very encouraging. I am planning to start live trades on pair-trading very soon and I will report those on Twitter just  like my day trading trades. This will not replace day trading at all, just would like to add another tool in my trading toolset.

There is no need to re-invent the wheel. There are number of software programmes and subscription based services on the Internet where you can download and easily find pairs. They work quite well. I will not recommend any services as they are all different and has positives and negatives. Try and see what works for you best.

Or like me, you can start from scratch and create your own pair finder software programme. I have created the software using matlab (I realise this is not for everyone, although it is not very difficult it needs certain technical knowledge especially in matlab programming – there are a lot of free to use libraries out there if you wanted to do it).

Please note, pair  trading is not risk free. Exactly the opposite in fact, it can be very risky if you choose the wrong pairs. It can be also time consuming (you will probably need a separate account and funds to try this ), it might takes from days to weeks for the profitable setups to take place.

Overall, I am very encouraged and will continue to test the system a little while before starting my live trades soon. I will update this blog again with the live results soon.

MONACOTRADER