Wednesday, February 17, 2010

Why I focus on Small, Thin Stocks?

If you have been following my trades you would have noticed that I generally pass up trades in stocks like CREE, DSW, SANM in favour of stocks like NEP, YUII, FSII, and SPU although they all had bullish setups with about the same probability of moving higher. There is one general reason and one reason specific to current circumstances.

The first has to do with the size of my account. Because I rarely purchase positions larger than $2,000 - $3,000 then I can move easily in and out of smaller cap, thinly traded stocks with out affecting the price. Also since the smaller cap, thin stocks like NEP are generally way more volatile and move more in a shorter time frame than bigger stocks like CREE I stand to make more money over the same time frame for the same amount of risk.

The second reason has to do with sector momentum. If you follow the stock markets you would have noticed that almost all the small cap Chinese stocks have recently been posting triple and double digit earnings/sales gains in addition to China itself report GDP growth in excess of 10%! In addition they are the ones with the highest relative strength ranks and are making monster moves on a daily basis. For example, CAGC moved up 12.14% yesterday alone without any earnings or news announcement! The only other stock that came close was MED which unlike CAGC does have a consistent history of making these types of moves and has suffered a nasty sell off recently unlike CAGC which is tapping on new highs like most of the other Chinese small caps.

When and if I do start managing larger amounts of money I will not only adjust my entry and ext strategies but I will also have to alter my stock selection criterion. A real life example of some one whose style I trade similar to is Dan Zanger (he is one of my role models). He had to adapt and so will I. However, until then I am going to take advantage of those beautifully volatile small cap momentum stocks.

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