In the Trading Lab at CEO.ca we have had a good run to finish 2016 including profitable trades in $GLD, $NUGT, $TSLA, and a particularly profitable trade (+35% in one week) in $NAK $NDM which I would like to share in this post.
Here is the chart of NAK (Northern Dynasty Minerals, TSX-V:NDM) which I shared with Trading Lab subscribers on December 19th before we entered a long position at $1.72/share on December 20th:
NAK has been under heavy accumulation since late-October and the rapid advances on heavy buying volume followed by steady, shallow pullbacks on light volume offer a distinctly bullish character to this chart.
After surging above $2/share on heavy volume on December 9th NAK proceeded to pull-back on much lighter volume and test previous resistance in the $1.50s. The solid advance on December 19th came on average trading volume which indicated that sellers may have exhausted themselves and the next leg higher was imminent.
We entered NAK on December 20th at $1.72/share based upon the thesis that the stock was beginning its next leg higher. Moreover, the risk/reward proposition was favorable with roughly 10% downside risk (stop below $1.55) and the potential to at least retest the high at $2.05 (~+20%) and potentially reach new highs.
The most important aspects of trade management are:
- Trade selection (selecting favorable entry points with asymmetric risk/reward)
- Position sizing (sizing positions appropriately to ones account size and risk tolerance)
- Allowing profits to run, but still knowing when to take profits and not be too greedy
Of the three points listed above, position sizing and risk management are the most crucial. If we take too much risk by trading too large or not obeying our stop losses then not even the best trade selection will save us. The market is going to do what it does and we will have losing trades, make no mistake about that. In fact, the best traders typically have about 50% unprofitable trades. However, the difference is that the best traders have much larger profits on profitable trades than losses on unprofitable trades.
NAK proceeded to oscillate for a few days and then caught some Christmas cheer over the weekend, coming under aggressive accumulation on Monday the 26th and Tuesday the 27th:
We officially exited NAK in the early afternoon on the 27th at $2.32/share. Admittedly NAK would go on to rise a further ~7% before peaking at $2.50, however, the reasons for ringing the register were clear to me:
- I had identified $2.50 as an ‘upside target’ based upon the size of the pullback since the $2.05 peak in early December. Once a stock gets so close to a target level or level of significant potential resistance it quickly becomes foolish to argue over pennies.
- Price had now become significantly overbought (well outside upper Bollinger Band, 100% above 50-day moving average!, etc.).
- Risk/reward was now much less favorable as a sell-off to the $2.00 area would be quite reasonable which now equated to 15% downside relative to 7% of upside to my $2.50 target level.
- My final reason was not chart based. At $2.25+ NAK is suddenly sporting a US$700 million market cap after being sub-US$200 million not long ago and their sole project remains stalled at the environmental permitting stage despite optimism to the contrary. In addition, there are nearly 56 million warrants outstanding with strike prices of C$.55 and C$.60 (under the Canadian listing NDM.TO) according to the company’s latest presentation. This means that there is an unusually large potential for ‘profit taking’ and end of year position size reductions.
Put it all together and it was time to take a 35% profit on this one week trade. Today’s trading session (-12%) confirmed that the decision to ring the register was a good one, at least in the short term. Taking profits on trades is an art, not a science. We must have a process that is grounded in risk management and utilize as much pertinent information as we can wrap our brains around to make these imperfect decisions.
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DISCLAIMER: The work included in this article is based on current events, technical charts, and the author’s opinions. It may contain errors, and you shouldn’t make any investment decision based solely on what you read here. This publication contains forward-looking statements, including but not limited to comments regarding predictions and projections. Forward-looking statements address future events and conditions and therefore involve inherent risks and uncertainties. Actual results may differ materially from those currently anticipated in such statements. The views expressed in this publication and on the EnergyandGold website do not necessarily reflect the views of Energy and Gold Publishing LTD, publisher of EnergyandGold.com. This publication is provided for informational and entertainment purposes only and is not a recommendation to buy or sell any security. Always thoroughly do your own due diligence and talk to a licensed investment adviser prior to making any investment decisions. Junior resource companies can easily lose 100% of their value so read company profiles on www.SEDAR.com for important risk disclosures. It’s your money and your responsibility.