One of the keys to making money trading stocks is to learn certain ways in which people behave in illogical or emotional ways and then trade to take advantage of those people. It is even better to understand why people act in certain ways so that the trader can be certain that they won’t change. One example of this is the pump and dump: I know that people are always greedy and lazy, so some people will always be willing to buy into the hype of a pumped company. I can profit from this by buying well-pumped stocks and by shorting them when the pump is over.
One of the things I have found with stocks is that people put a lot of importance on round dollar marks, such as $1.00, $2.00, $5.00. So if a stock breaks a round number it will tend to run. People like to think with whole numbers partly because it is easier to do mental arithmetic using those numbers. This leads people to place many buy and sell orders right around round numbers. For a stock at $2.90, there may be twice as many sell orders between $2.99 and $3.01 as between $3.01 and $3.10. So if a stock can break through a round number (in either direction) it will tend to run a bit. While this does not work all the time, it does work more than 50% of the time, at least with momentum stocks priced under $10.
While it is easy to find inefficiencies in the market, it is possible for many of them (like the January effect) to be arbitraged away. Therefore, it is always nice to see evidence that a particular inefficiency has been known for some time and yet remains; this indicates it is less likely to go away. Here is what the great trader Jesse Livermore wrote about round numbers:
Many years ago I began to profit from the simplest of type of Pivot Points trades. Frequently I had observed that when a stock sold at 50, 100, 200 and even 300. a fast and straight movement almost invariably occurred after such points were passed.
Another psychological pivot point that I use to trade is green/red or red/green, when a stock breaks above or below its previous day’s close. While the difference of a couple cents is minuscule in real terms, there is a big psychological difference between a stock being up for the day and a stock being down for the day. This is related to the tendency of traders to prefer to take small profits but not take small losses. Even if the amount of money involved is tiny it is psychologically painful to take a loss but pleasurable to take a gain.
When the Reaper says “I’m going to destroy this stock,” you might want to watch out. I posted that in the TimAlerts members-only chatroom (sign up here for Timalerts) as I advised anyone long AEXP to sell before I started selling short. AEXP was a Stockpreacher / Beacon Equity pump from $1 and I started shorting at $1.90. I averaged my position up to 6500 shares at $2.12 as it hit a high of $2.55. I later covered at an average of about $1.58 for a cool 25% profit margin. At the time I had finished covering my position my trading represented over 3% of the volume in AEXP today.
I also went long 20,000 shares of GVBP at $0.26 this morning in pre-market trading but that trade was busted as a trade-through. It was still a nice risk/reward: my risk was the $26 in commissions I paid and my potential reward was over $5,000. So even with a 99% chance of the trade being busted I thought it worth a shot.
I am happy with my trading today and am glad to be in the green for the week.
GGC was negative in pre-market. I bought it just a minute after open after it jumped green. I had incredible patience for me, selling 10 minutes later after it twice failed to take out big offers at $18.10. This turned out just like I thought it would.
Dumb play on VHC, I had the right idea but I was slow to sell and buy. I am generally bad at quick-moving plays like this that can go either way.
+ SLD 3,000 PAL false Stock 3.110 USD SMART 14:25:52 15.00
+ SLD 3,000 PAL false Stock 3.088 USD ISLAND 14:28:29 15.00
+ BOT 3,000 PAL false Stock 3.020 USD ARCA 14:59:31 15.00
+ BOT 3,000 PAL false Stock 3.030 USD SMART 14:59:48 15.00
PAL was what I call a fat-fingered short. I don’t mind going reasonably large in these; risk/reward is good although this strategy leads to occasional big losses. In this case it was CNBC pumping it. 40 cents (18%) vertical moves in 30 seconds are in general good shorts unless there is real news. It didn’t turn out as I predicted but I still had a halfway-decent profit.
For your reference, here are my year-to-date profits for the above-mentioned trading strategies: