This picture has not been a pretty one. TSSI has fallen 72% since its June 26th high close of 31.10. And to be honest, this is both the best and worst stock to use as an example of what I’m doing. But the pros outweigh the cons, so I’ll use it, but with some caveats.
First of all, I didn’t make all of these trades. They are here because they were valid signals and illustrate the point of what I am doing and why. I have made many of them, and I’ll make many more. So why did I choose TSSI here?
First, it is to show that with the right situation and discipline, it is possible to make money long even when stocks are cratering. I will say, though, that the story would not be the same for all stocks. How a stock falls matters, and whether it will ever come back again or not does too. I would never use this, for example on some meme stock that requires hype to create escape hatches for foolish entries.
Second, it is an illustration of the most important feature of this kind of trading – volatility. Most people fear it when it comes to stocks, but harnessing it can allow for successes that non-volatile stocks cannot and in some way, create safety with that volatility.
This method does not work well on stocks that lack sufficient volatility. The more volatile, the better, in my experience – so long as the company is a legitimate one. Any stock trading 70% below its IPO price is one I would only ever short. Yeah they may have a day where they pop 60 or 70% and hooray for whoever catches one of those. But for the most part, those stocks will give that whole move back, and the rest of the 30% to zero or delisting as well.
The methodology is as follows:
Step 1: find a stock whose median daily open to high move is at least 2%. I try to look at both longer term and more recent data there and go with the lower of the 2 values. Volatility ebbs and flows over time. Recent values higher than the long term averages tend to mean revert and can leave me out to dry waiting for a return that is too fat. I have my own indicator to do this for me, as this is very labor intensive to do manually. It’s private, though, and TV has too many hoops to jump through for me to hassle with making it public. Sorry. But a 2% median open-high is a hard floor for me. I won’t do this kind of trade for a stock lower than that. I’ll explain why later.
Second: the setup here could be really any short term oversold indicator. I use a self made, non-repainting, one day offset SD channel. Sorry, that one’s private too, but a regular one like the one on the chart is fine too. Bollinger Bands, RSI, etc. can also be used if you want. They all work for me, more or less. I prefer using short timeframe settings and 2 SD bands.
Longer time frames and/or wider bands will produce fewer signals, which can be both good and bad. During a really rough downturn, for example, it will keep your exposure limited. As you can see on the chart, this method using my preferred setting is bag holding on a couple of trades that are down 60% so far, another down 44%, and a couple more down 18% and 11%.
My settings are not for the faint of heart. Wider bands and longer time frames reduce that, but also reduce the number of winning trades as well. I prefer to deal with the bag holding risk by using smaller lots, since I get so many more trade signals than with most other trading methods I use, but changing the sensitivity of the signal to be less sensitive is certainly a fine way to go as well.
Also, for those who aren’t familiar with my trading, I do not use stops. I don’t recommend that for everyone. Most people should. I have some lots of other stocks that are down in excess of 90% right now. If you can’t handle that, you should be using stops. I just have found them to not be all that protective with the way I trade. I prefer to overwhelm those big losses with a ton of wins until they become irrelevant. One thing I have been looking at, though, is that catching tops is the worst case scenario here, and it may make sense to use a 20% stop if a trade is the first signal after a high, but I haven’t put in the time to quantify whether that is a smart move or not. Do as you like with stops, but the less trading experience you have, the more I’d recommend them.
Money management is key if not using stops – lot sizes too large will cause you to run out of capital before you can get losses cancelled by wins. I always would err on the side of smaller lot sizes to prevent that. You make less money, but you never get shut down due to lack of funds. What I’m doing here may seem like a get rich quick scheme, but it is actually the opposite. It is very conservative and I end up being in way more cash than most people most of the time.
I am up about 7% on the year so far in my account and I am holding about 50% cash. That’s about average for me. The lowest I’ve been in a while is maybe 20% cash reserves. This method and the others I use lets a little cash do a lot of work while keeping a safety net in place for tough times. I would ALWAYS recommend that.
So, back to the setup. My entry is whenever the price crosses the lower boundary of the SD channel (only 1 per day, though, unless a previous trade from that day has already closed with a win.
My SD channel does not repaint and is based on the previous day’s value, so at the start of the trading day, I know what my entry level will be for a particular stock and can put a buy order in at that level. Either it gets hit or it doesn’t and that target isn’t a moving one the way it is for a BB or regular SD channel that fluctuates with intraday price moves. I only do this with a handful of stocks, so it isn’t a major chore to get those entry targets set up.
Once a buy is triggered, I envy the people who have access to “one triggers the other” orders. If I did, the entry would automatically trigger the placement of the sell order. The level of that sell is where the 2% rule I mentioned earlier comes in. My exit target is 2x the median O/H move, rounded down to the nearest whole %. The rounding just keeps the math simpler for me.
So for TSSI, the median intraday upside move is around 3%, so I set the sell order for a gain of 6%. That level can be tweaked to be more aggressive or conservative, but there are risks to both. A level too high (ESPECIALLY during a downtrend) sets you up to be a bag holder of a bunch of lots – we do NOT like that! However, it might seem safer to say, just target 1%. But here’s why that isn’t ideal either.
I brought up the 60% losing trades earlier for a reason. Sometimes, even with only a 1% target, you’ll get stuck with one of those. It’s just part of the deal. Sometimes you catch tops. The way I deal with them is to cancel them out with wins. However, if the wins are only 1% wins, I need 60 of them to cancel out a 60% loss. With a 6% target, I only need 10.
In this example in the chart, I chose this time frame because it is pretty much a worst case scenario. But prior to June, TSSI had been on a metoric rise and every trade rang that 6% register. Literally, every trade I’d have EVER placed on this stock prior to June would have paid 6%. But drops are part of the deal and if you get in at the exact wrong time, which is inevitable if you trade long enough, how the system works needs to be able to withstand that worst case scenario.
So since June, the record here would be 33 6%+ wins vs. those 5 losses I mentioned earlier. But since the wins were all at least 6%, they combined for a +199% return collectively. The 5 losers are at -188%. So WHILE THE STOCK WAS FALLING 70%, the wins more than compensated for the losers. In the event the stock reverses, which I expect happens eventually, I will start stacking wins WHILE shrinking those losses or turning them into wins. At that point, the returns become compelling. But to even be able to say you are making any money long overall while a stock is dropping 70% is no small thing. It makes you much less worried about market crashes, as long as lot sizes and profit targets are well constructed.
And for those who might consider this a one off anomaly, I’ll give 2 other examples. First, go to the minds for ECX and look at the mind I just posted there today. ECX is down 46% in the span of those trades.
Another example is ALAB. Since the November high, it is down 40%. The net gains on 47 trades during that span (including 4 open losers – the largest of which is -36%) is +100%. To illustrate what happens when times are good, the backtest on ALAB to its IPO in March of ’24 would would have yielded around 200 trades, only 4 of which would still be open losers, and a combined net gain of 887%. Over half of those trades closed either same day or the day following the opening trade.
Now for the risks. The biggest risk here is that you accumulate exposure during long downtrends by taking every trade. If lot sizes are small enough, it’s not a big deal. But it’s very easy to run out of capital here getting greedy and going for a big score, given the stats I mentioned. But don’t forget the cardinal rule of statistics – they only tend to predict reality over large sample sizes. Over the short term (as evidenced by TSSI and ALAB’s epic drops of late) it may not. You have to be able to live to fight another day with this method and that first and foremost involves checking that worst of trading emotions (greed) at the door. The market can keep going down longer than you can afford to keep buying unless you really control your lot sizes.
The second risk is that by not using stops, I run the risk of tying up capital in losing trades for extended periods of time. While not specifically using this method, I have more than a few trades I’ve been holding over a year. After the 2000 or 2008 crashes, those holding periods sometimes stretched a decade or more. A friend of mine had a pile of CSCO he’s been holding since the dot com crash that only recently became profitable. That’s something it’s important to be prepared to deal with. Also another argument for using stops if that’s not OK with you.
So anyway, today’s long entry here was actually at the close at 8.79. My exit target is 9.31. The aftermarket trading has gotten me halfway there already. Feel free to accuse me of cheating, but my time-stamped prior ideas would show you that’s not how I roll. It has just taken forever to write this, as I’m sure you can imagine if you’ve taken the time to read it all. Congrats and my thanks if you did. My apologies for typos or other grammatical errors – I haven’t had time to proofread this. Feel free to point out any errors that need fixing. If anyone would like clarification on anything I’ve written here, please don’t hesitate to leave a comment and I’ll address it as soon as I can.
As always – this is intended as “edutainment” and my perspective on what I am or would be doing, not a recommendation for you to buy or sell. Act accordingly and invest at your own risk. DYOR and only make investments that make good financial sense for you in your current situation.
