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Winning Secret for Short Term Trading 2

Buying on Fear

July 07, 2009*

There are two types of trading styles:

  • Buy High and Sell Higher, so called "Momentum Trading".
  • Buy Low and Sell High, so called "Buy on Weakness and Sell on Strength".

If used properly, both could be very profitable.

Many investors like momentum play.They believe that if a stock traded higher, it could go much higher. Yes, many times, this is the case. You must have heard the sayings such as "follow the trend", "trend is your friend".

Why stock price goes up? It is very simple: Buyers outnumbered sellers. Therefore, momentum trading has its merit.

In this session, we would like to discuss the second type of trading's: "Buy on Weakness and Sell on Strength".

That is, we want to buy when no one wants to buy and sell when no one wants to sell. In the extreme case, we want to buy on fear and sell on greed. In particular, we want to buy when most investors consider the stock is worthless, or the shareholder' value is completely wiped out. The most fear thing or the nightmare an investor can imagine is when the company went to bankruptcy because the shareholder's right is the last to protect in such cases.

In fact, the most profitable trades we ever had all came from the second case, either the company is delisted and moved to pink sheet market or filed BK.

If you looked at our trading records, we can find two such cases: our trades on BBC and FRE. After BBC was delisted from AMEX market and became BBCZ.PK, we doubled our positions and made a quick trade. We had 100% gain on BBCZ.PK even we lost 80% on BBC. Basically we break even on BBC.

You may all know what we did on FRE, we took a position on FRE after government took over the company and declared that the company's common shares were wiped out. We made several profitable trades on it and one trade with nearly +400% return in five days.

Other examples:

CEM - One of our losers. We bought it at $1.01 and sold the stock at $0.12, just days before the company filed BK. The following chart showed what happened after the stock was delisted from NYSE and traded as CEMJQ.PK.

The stock gained almost 2,000% in two months from $0.02 to $0.40. We can still make 400% gain if we just hold it into BK.

VC - Auto parts company. It filed Chapter 11 on May 27, 2009 and becomes VSTN.Pk after the filling. The stock gapped down on May 28 from $0.31 and closed at $0.08.The stock had a down day in the following day and closed at $0.06. That was the bottom. The stock was in rally mode in the next eight days and made near 400% return during the rally. The stock had an intraday high of $0.30 on June 11.

GM - General Motor filed Chapter 11 on June 1, 2009 and traded at pink sheet market with a symbol of GMGMQ.PK thereafter. The stock closed at $0.61, down $0.14 from June 1's close. Seven days later, it becomes a $1.70 stock, a 178% gain.

HAYZQ.PK - We never owned this stock. This stock also had a quick more than 100% bounce after BK.

Now comes to LEA or LEAR.PK. Its chart will be put here later. Can we make another profitable trade? Let us find out.

* The article was published on July 7, 2009. We did have used our study here and traded LEA and LEAR.PK few times in 07/07/2009 - 07/09/2009 and made good profit. (see our Short Term Portfolio 07/2009 Trading Records).




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