REFLEXIVITY as it applies to penny stocks trading.(in my opinion)
But first, let me get this out of the way: Basically, what you are saying in a nutshell is this:
Find a really good way of determining the fundamentals of a financial instrument, thereby determining if it is garbage or not.(e.g. like
Steve Eisman and his profit from 2008 crisis.)
(2)Find a really good way of ascertaining the SENTIMENT level of the participant in these financial instruments so that you can bail when it starts to shift. (e.g, suffer the fate of
Julian Robertson during the tech bubble)
In that way, you are in and out with profit...leaving others to hold the bag.
I understand what you are saying with regards to CDS and CDOs but....that is just a general case.....what i was asking for, when i say, specific examples, is how would a layperson go about applying the same thing to say, china/solar companies....or crocs stocks....or tech bubble stocks...or mortgage companies stocks...or penny stocks....
The core principle here is to look for a situation where the fundamentals and the perception are totally, incredibly out of phase. Then to take advantage of that gross misalignment. I was looking for a well-outlined examples of doing that....not a general exposition. Why? at the end of the day, it is all about making money. that is the reason why we learn the theories.
Do i have my own approach to this? yes.
This gross misalignment is most apparent in penny stocks: Fundamentals are total garbage but price of the stock are flying through the roof. This is the place where i first cut my teeth.
I use it with penny stocks back in the day...when i was starting out....until i made enough money that i could not accommodate myself with pennies due to liquidity issues...and market crash...at first, i compensated for this liquidity problem with the help of a market tactic called: tape reading....but, that soon reached its limits too.....remember those were the days when we had penny stocks that rose 1,000% in one day...yes, you are reading that correctly:1,000% gain. Some stocks, especially, green technology stocks during 2006 can move 1,000% between opening bell and closing bell. On multi-weekly basis, other types of stocks can post 13,000% gain in a few weeks is not uncommon...stocks like FHAL, ENAB, MMTIF, GETG, NCEN, HEPI, ZAAP, GEECF, BWMS, NXCO, SMTA.....some of these stocks ranges from $0.001 to $5 in pps. Most are probably delisted by now because they are garbage. Stocks gain of 100% per day were daily occurrences. Even now we still have some of these +100% gainers in one day.
Check it out the list from last friday. Look at %Chg on the right. They are updated daily. These stocks were rife with fake reverse mergers, fake earnings...fake business deals with non-entities...nonsensical stock splits....all sorts of garbage shell stocks...phony PIPES...shortsqueezes(real or imagined)....etc....Those were the days when i used to troll
IHUB watching the irrational exuberance and then making money from the bloodletting...it was quite ugly actually:You get to meet shady characters that pump and dump like
"shakerzz aka King of Pennies" and
BB and
MOMO.
The boss of them all:
STOCKSTER.. See the SEC charges against him.
I studied these scam artists bullshit like crazy and then reverse engineer the fucker out of it.
When i asked for concrete examples, i was looking for a conceptually similar but different approach that you may have for options, bonds, futures trading. Something practical. Something that i can learn from:adding to my treasure trove of trading knowledge.
Here is a primer on how i used to trade those penny stocks for serious gains:
ENTRY PARAMETERS:
1. Go for stocks that have ran up from breakout point(from a consolidation) by at least 80% gain or more; preferably at 52 weeks high; that is now collapsing on +$100,000 worth of volume.(you will need to multiply the pps with the trading volume to get this.). The breakout must be from a consolidation that have congealed for 6 months no less. (reasoning behind this: I noticed that those scammers tends to pump of stocks with solid consolidation base of a few months...i also noticed that when price return to those consolidation bases...the scammers will generally start another run..that is why i placed my buy entry 3% above those levels.)
2. Initiate buy entry at 3% off the breakout point.(this is the point where the euphoria began in the 1st place)
3.Stock pps should be $0.1 or above(i used to go for as low as $0.0001...experience taught me otherwise).
4. Avoid stocks that fell on PR(negative or positive) news by at least 2 days margin. This is the world of penny stocks...positive news is bullshit...negative news is also bullshit.(reasoning behind this: i used to try and use positive news to trade them...i realize through a lot of followup exercises, that they are MOSTLY lies. Even some negative news are released just to artificially depress the pps of the stock for the players to buy back at discount before the CEO release a bullish news to squeeze shorts.)
5. Establish 1st and 2nd resistance levels; establish 1st and 2nd support levels. Look for pivot points 1st and 2nd levels...see if it snuggles nicely to S/R levels.( reasoning behind this: i noticed that pps will create these levels from churning: large volume trades with lots of PR news with little price movement. Which means: smart money players are selling to fools or bulls and bears are battling it out. i take note of these levels to watch if history repeat itself.)
INTRA-TRADE MANAGEMENT:
6. Use the 10, 40, 50 SMAs. I tried all the smas and indicators...every fucking last one of them with penny stocks...i realize for fast in and out...the SMAs 10. 40. 50 works best.. (reasoning behind this: the SMAs are simply averages...like velocity or stochastic averages...it is a probabilisitic distribution of price behaviour...pennies operate on a much smaller timeframes than regular stocks...that is why 10 days or 40 days or 50 days smoothed averages are more applicable..something that have less relevance with bigger stocks(50, 100, 200)
7. Zones that are are free of these 3 SMAs are runners zone. When these SMAs are clusters around resistance points they are almost unstoppable. (the reasoning behind this should be self-evident: we have mean zones of probabilistic distribution coupled with areas where smart players like to dump their cargoes...what do you think will most likely happen at such a point?)
EXIT PARAMETERS:
8. If your pps closes below these SMAs get out before market closes. If your entry point rests on these SMAs....you have a winner. (again, the reasoning behind this should be self-evident)
9. Use those three SMAs and/or 2nd resistance zone and/or 2nd day close in the red to determine exit. 10sma is the deadliest.(again, the reasoning here is self-evident)
10. Profit potential: From as little as 30% gain to as high as a 400% gain. I dont push my luck by aiming for 1,000% gain...i just want to take the middle. Penny stocks move soo fast up and down, you wont believe. Period of trade length: 5mins to a week. By fastest gain was a 50% return within 4mins. You should at least have +30% gain by at the latest, day 2 of trade.
(** as you can see, the basis here is that the fundamentals of penny stocks is a lie. which is true. everything about it is a lie. which is also true. I DONT CARE HOW GOOD AND BELIEVABLE IT IS. I have seen enough bloodletting to know otherwise. I look for a stock with a clear case of pumping bullshit and observe patiently the pattern exhibited by the scam artists...wait for it to start repeating itself because scammers are like that...that is when i then get in and out like an expert tightrope walker. In a nutshell: All i am doing here is exploiting behavioural psychology to profit. This wont work very well if the fundamentals are good.**. It is imperative that the fundamentals and price action DIVERGE considerably. hence the use of penny stocks.**)
THIS IS WHAT I MEAN BY concrete, practical examples of disjoint between fundamentals and euphoria or sentiment. Now, if you have something like that for options, bonds, futures that is actionable...that is different but similar in psychology, i am all ears.
My two cents.
Quote: (02-23-2012 04:29 PM)Cicero Wrote:
Quote: (02-23-2012 02:39 AM)Entropy Wrote:
Quote: (02-22-2012 11:07 PM)Cicero Wrote:
Read up on reflexivity as an alternative to classical economic theory. It's the framework George Soros uses to think about market fluctuations.
that is nice and dandy, alchemy of finance....but, how do you practically use this to make money?
Give concrete, practical examples....
Well you start with the framework that the theory of efficient markets is bunk and you recognize that in times of boom and bust, the quant models won't hold up and you exploit that fact.
Equilibrium is only possible in a world without reflexivity: in a world with it then prices can be driven to insane levels simply because of people behaving like people. If enough investors believe that a price change is indicative of something important and follow the trend then the trend can take on a life of its own and equilibrium be damned.
Example - CDOs were "engineered" under the premise of efficient markets and had built in predictions of how the market would act under certain circumstances. Surprise surprise, the CDOs didn't behave as the models says they should've. Those who realized models were flawed and fragile profited handsomely by buying CDSs against CDOs.
