This article is published by CommSec and is intended for CFDs. However the techniques seem to be quite useful for other derivatives and even trading stocks directly.
"Avoiding the commitment to failure
In theory, when a trader experiences a decline in the value of an investment the desire should be to exit the position. But often the opposite occurs. A behavioural concept known as ‘escalating commitment to a chosen course of action’ can be the downfall of a trader, especially when using a leveraged product such as contracts for difference.
Forced compliance studies induced individuals to perform unpleasant or dissatisfying acts in the 2003 text The Social Psychology of Organizational Behaviour, edited by Leigh Thompson. Because the individual could not undo the consequences of the act, it was found that the individual biased his attitude towards
the experimental task so as to reduce any negative outcomes resulting from the behaviour. By justifying prior behaviour the decision maker increased his commitment in the face of negative consequences and the higher level of commitment in turn led to further negative consequences.
Probably the most famous example of escalating commitment to a chosen course of action was the Vietnam War. In a 1965 memo from former Under Secretary of State George Ball to US President Lyndon Johnson, Ball wrote “Once we suffer large casualties we will have started a well-nigh irreversible process.
Our involvement will be so great that we cannot - without national humiliation – stop short of achieving our complete objectives.”
In the trading world, once a trade turns bad a trader can rationalise his bad decision and increase his commitment by either staying in the position as losses grow or by adding to the position in what is commonly known (with long positions) as averaging down.
When a losing trade is not exited quickly, because of the leverage factor, losses can mount exponentially. Nick Leeson’s futures trading in Singapore in the 1990s was an example of an escalating commitment to a chosen course of action in a leveraged product. But small private traders managing less spectacular
amounts of capital should also be aware of the phenomenon because it is not uncommon for small traders to end their trading career with a single catastrophic trading loss.
Some simple rules can help you to avoid the big loss and stay disciplined:
1. Trading is a 50-50 prospect. A trader can win less than 50% of the time and still be profitable. Success or failure is not due to the amount of winners you pick but rather the dollar return on winning trades versus losing trades. In other words, be consistent with your risk amount and stop losses and aim to make your wining trades larger than your average losing trade.
2. Markets don’t behave rationally therefore sticking to a losing trade can never be rationalised. Prepare mentally and financially for both scenarios before you enter the trade - winning and losing - by placing stop loss orders and identifying possible price points where the trend may become exhausted.
3. A study of multiple choice examination habits has shown that going back and changing answers increases the chance of being wrong. Never move a stop loss level once it is set, unless it is in the direction of the trend you are trading.
4. Moving a stop loss order with the trend will help you maximise profits because you are changing your exit level in accordance with the market direction. Some experts advocate never exiting a trade unless it’s on a stop loss order – any other approach is effectively picking a top (or bottom).
5. Always aim to place a break-even stop-loss order after your initial stop loss order. A break-even stop is a free ride. No one ever went broke from not taking losses.
6. Choosing not to trade can be more difficult than taking a trade. When there are no good trading opportunities it’s best to sit on the sidelines.
7. In a bull market your goal is to make money from the upside and in a bear market your goal is to make money from the downside. In other words, it’s smarter to look for short trades in a bear market.
8. The middle of the trend is the “meat in the sandwich”; the beginning and the end of a move are inconsequential. If you want to be profitable only trade the middle of the trend.
9. The bull market for stocks has created a bullish bias. Therefore stocks that are breaking down can do so more quickly than rising stocks as the majority of traders exit long positions. Be prepared to act quickly in a falling market.
10. Information such as technical indicators and economic news can be used to justify a losing position. Price is the ultimate arbiter of value. Follow the price. "
As with all other articles on this blog, this article is not considered financial advise, but merely for thought and discussion.
Saturday, July 12, 2008
Sunday, June 22, 2008
TLS - A case example in Stochastic Oscillator and Momentum(ROC)
Previously we looked at TLS when the Rate of Change (ROC) is crossing into negative territory indicating the possible start of a downtrend.
http://ozstock.blogspot.com/2008/05/tls-rate-of-change.html
Today we look at a new analysis where TLS has indeed fallen. The new graph below shows the price has drop since around the last analysis on 28 May. The new graph has a Momentum (this is actually the Rate of Change indicator) with a longer period of 12 days and only crosses the negative region after 3 June and has trended down since. So the shorter ROC predicted this trend earlier but the longer ROC gives confirmation later.
Another interesting indicator is the Stochastic ocsillator (SO) which has confirmed the trend. In general when the SO oscillator is above 75% it indicates an overbought position. It signals a time to sell when it crosses the 75% line downwards. Conversely, if it is below 25%, it is oversold. When it crosses above the 25% line in the upwards direction, then it is a signal to buy.
In the case of TLS, it crossed the 75% line and moved downwards, thus indicating time to start selling - which confirms the ROC analysis. Recently, the SO has fallen below 25% and headed upwards again. However, it quickly went down the 25% line again. Using the ROC/Momentum indicator, it gave a strong signal that the 25% break-out was not a strong trend since the ROC is still well in negative territory.
At the latest point, the momentum is still quite negative. This indicates it is not time to start buying TLS yet. For those in short already, this may be a good time to start offloading. When ROC starts approaching the 0% line from the bottom and ROC starts crossing teh 25%, then it will be time to buy again.
Technical Note:
ROC = (Current Price - Price N days ago)
...... ----------------------------- x 100%
Price N days ago
In some literature, Momentum is similar to above but without the division and percentage.
http://ozstock.blogspot.com/2008/05/tls-rate-of-change.html
Today we look at a new analysis where TLS has indeed fallen. The new graph below shows the price has drop since around the last analysis on 28 May. The new graph has a Momentum (this is actually the Rate of Change indicator) with a longer period of 12 days and only crosses the negative region after 3 June and has trended down since. So the shorter ROC predicted this trend earlier but the longer ROC gives confirmation later.
Another interesting indicator is the Stochastic ocsillator (SO) which has confirmed the trend. In general when the SO oscillator is above 75% it indicates an overbought position. It signals a time to sell when it crosses the 75% line downwards. Conversely, if it is below 25%, it is oversold. When it crosses above the 25% line in the upwards direction, then it is a signal to buy.
In the case of TLS, it crossed the 75% line and moved downwards, thus indicating time to start selling - which confirms the ROC analysis. Recently, the SO has fallen below 25% and headed upwards again. However, it quickly went down the 25% line again. Using the ROC/Momentum indicator, it gave a strong signal that the 25% break-out was not a strong trend since the ROC is still well in negative territory.
At the latest point, the momentum is still quite negative. This indicates it is not time to start buying TLS yet. For those in short already, this may be a good time to start offloading. When ROC starts approaching the 0% line from the bottom and ROC starts crossing teh 25%, then it will be time to buy again.
Technical Note:
ROC = (Current Price - Price N days ago)
...... ----------------------------- x 100%
Price N days ago
In some literature, Momentum is similar to above but without the division and percentage.
Saturday, June 14, 2008
Analysis - PLT - Polartechnic
Quick Analysis: This check is done to see if further detailed analysis is ready.
Shares at 9 May 2008: 240,314,531
Cash Left at Dec 2007: 10,401,529
Cash / Share = 4.33 cents
Price at 13 June 2008: 0.125
Price / Cash = 2.88x
The Price / Cash look reasonable enough for further analysis.
Price($) 0.13
NTA ($) 0.05
P/NTA 2.32
Team 3.3
BurnPeriod 2.64
ProductPipe 17
ForeignMarket 6.9
Cash:Debt Debt Free
It has now been 2 full years since the corporate distractions caused by temporary chairman Dr Opara in 2005. The company has restructured and the current management, chaired by Robert Hunter, managed by Ben Dillon (CEO) and Prof Neville Hacker as been in place for almost 3 years since the turbulent 2005. This is an indication of stability of management. Their skills are evident in turning around the company from negative equity (likely due to the 2005 saga) and recapitalised to $9.7m in equity in H1 FY08. Despite just a 3-person director team, their team score is 3.3 which is considered good although 5.0 is the good score.
PLT has moved from R&D into commercialization and is currently focussed on Sales and Marketing. Within the last year it had obtained distribution or registration in the following countries: Russia, China, Taiwan, India, Malaysia, South Korea. This diverse foreign market penetration leads to an above average Foreign Market score of 6.9. A note from experience is that even for biotechs with commercialised products and diverse foreign market, does not translate to profitable sales (see Clinical Cell Culture CCE)
Its main products include:
- TruScreen, a real time cervical cancer screening device. This has penetrates SE Asia as well as China and India. PLT is also developing a primary screening for cervical cancer to be marketed as CerviScreen.
- Mediscan, clinical record system include video imaging, patient records, reporting tools and configurable dataset.
- Screening device for detection of melanoma.
All 3 products are in market in various international markets. The 2007 Annual Report noted that PLT has shifted resources from these developed products to Cerviscreen and preparing to enter new markets. Based on current products, the Product score is 17.0, which is much higher than the excellent level.
Quarterly analysis is not available, since reports are only on a half-yearly basis (reflection of size of the company?). Receipts in the latest half H108 was down significantly ($241k compared to over several millions for previous half years). PLT attributes this to the cessation of the Cosmetic and Beauty products line but SolarScan and TruScreen revenue were also decreased. Operating expense in H1 08 has increased to $4m. Despite the recent re-capitalisation, this cash burn rate mean PLT has about five quarters left. PLT is debt free and also has no intangible assets. Comparing the current price to NTA, the ratio is about 2.3 times. A number of 3 or less is considered cheap to buy. PLT did a capital raising in late 2007 for $0.40/share. Its price now is 12.5cents.
In summary, the in-market products, management team, the foreign market penetration and he recent re-capitalisation makes many numbers look quite attractive but bear in mind that continued operation expense without increase in profit will deplete the financial resources. This could be a speculative buy with strong upside but needs careful attention over the next 12 months.
Shares at 9 May 2008: 240,314,531
Cash Left at Dec 2007: 10,401,529
Cash / Share = 4.33 cents
Price at 13 June 2008: 0.125
Price / Cash = 2.88x
The Price / Cash look reasonable enough for further analysis.
Price($) 0.13
NTA ($) 0.05
P/NTA 2.32
Team 3.3
BurnPeriod 2.64
ProductPipe 17
ForeignMarket 6.9
Cash:Debt Debt Free
It has now been 2 full years since the corporate distractions caused by temporary chairman Dr Opara in 2005. The company has restructured and the current management, chaired by Robert Hunter, managed by Ben Dillon (CEO) and Prof Neville Hacker as been in place for almost 3 years since the turbulent 2005. This is an indication of stability of management. Their skills are evident in turning around the company from negative equity (likely due to the 2005 saga) and recapitalised to $9.7m in equity in H1 FY08. Despite just a 3-person director team, their team score is 3.3 which is considered good although 5.0 is the good score.
PLT has moved from R&D into commercialization and is currently focussed on Sales and Marketing. Within the last year it had obtained distribution or registration in the following countries: Russia, China, Taiwan, India, Malaysia, South Korea. This diverse foreign market penetration leads to an above average Foreign Market score of 6.9. A note from experience is that even for biotechs with commercialised products and diverse foreign market, does not translate to profitable sales (see Clinical Cell Culture CCE)
Its main products include:
- TruScreen, a real time cervical cancer screening device. This has penetrates SE Asia as well as China and India. PLT is also developing a primary screening for cervical cancer to be marketed as CerviScreen.
- Mediscan, clinical record system include video imaging, patient records, reporting tools and configurable dataset.
- Screening device for detection of melanoma.
All 3 products are in market in various international markets. The 2007 Annual Report noted that PLT has shifted resources from these developed products to Cerviscreen and preparing to enter new markets. Based on current products, the Product score is 17.0, which is much higher than the excellent level.
Quarterly analysis is not available, since reports are only on a half-yearly basis (reflection of size of the company?). Receipts in the latest half H108 was down significantly ($241k compared to over several millions for previous half years). PLT attributes this to the cessation of the Cosmetic and Beauty products line but SolarScan and TruScreen revenue were also decreased. Operating expense in H1 08 has increased to $4m. Despite the recent re-capitalisation, this cash burn rate mean PLT has about five quarters left. PLT is debt free and also has no intangible assets. Comparing the current price to NTA, the ratio is about 2.3 times. A number of 3 or less is considered cheap to buy. PLT did a capital raising in late 2007 for $0.40/share. Its price now is 12.5cents.
In summary, the in-market products, management team, the foreign market penetration and he recent re-capitalisation makes many numbers look quite attractive but bear in mind that continued operation expense without increase in profit will deplete the financial resources. This could be a speculative buy with strong upside but needs careful attention over the next 12 months.
Thursday, May 29, 2008
Analysis - BDM - Biodiem
Analysis - BDM - Biodiem
Price($) 0.125
NTA ($) 0.11
P/NTA 1.156
Team 10.4
BurnPeriod 4.02
ProductPipe 6.9
ForeignMarket 1.4
Cash:Debt DebtFree
Biodiem is a pharmaceutical company with 3 main apparently distinct products. It is developing a live attenuated influenza vaccine (LAIV) and is collaborating with international bodies, Nobilon and CDC in the US. LAIV is also licensed to Nobilon and is in pre-clinical development. Another product BDM-E for retinal eye disease has completed Ph I/II and shown no toxic effects although no significant improvement at those dosage levels. It third product BDM-I, a substitute for anti-biotics in animal feed, has been commercialized. The latter has a great influence on the high product score, but one should be cautious that in this case, the most advanced product may not be that profitable.
The Team score is quite high, reflecting strong scientific expertise. The Foreign Market score is low but BDM has strong collaboration with research bodies in the US.
As for the last 3 years, Q2 is the quarter BDM receives significant receipts, 08Q2 continues this trend. Also capital raising occurred in 08Q2 of about $7m at $0.30 which is a huge premium relative to current price. Projecting the cash burn rate, BDM can last about 4 quarters - which is risky but not overly so.
Financially, BDM is debt free and has almost no intangible assets. It has managed to raise capital via equity yet maintaining a low volume of shares. The share price is one third of last years, yet with no adverse fundamental reasons, apart for the waiting time of product development. At the last price of 12.5cents, its Price/NTA is about 1.156 which is extremely cheap, indicating there is no price premium for any of the products.
Suggestion: Buy at 12c or below.
Price($) 0.125
NTA ($) 0.11
P/NTA 1.156
Team 10.4
BurnPeriod 4.02
ProductPipe 6.9
ForeignMarket 1.4
Cash:Debt DebtFree
Biodiem is a pharmaceutical company with 3 main apparently distinct products. It is developing a live attenuated influenza vaccine (LAIV) and is collaborating with international bodies, Nobilon and CDC in the US. LAIV is also licensed to Nobilon and is in pre-clinical development. Another product BDM-E for retinal eye disease has completed Ph I/II and shown no toxic effects although no significant improvement at those dosage levels. It third product BDM-I, a substitute for anti-biotics in animal feed, has been commercialized. The latter has a great influence on the high product score, but one should be cautious that in this case, the most advanced product may not be that profitable.
The Team score is quite high, reflecting strong scientific expertise. The Foreign Market score is low but BDM has strong collaboration with research bodies in the US.
As for the last 3 years, Q2 is the quarter BDM receives significant receipts, 08Q2 continues this trend. Also capital raising occurred in 08Q2 of about $7m at $0.30 which is a huge premium relative to current price. Projecting the cash burn rate, BDM can last about 4 quarters - which is risky but not overly so.
Financially, BDM is debt free and has almost no intangible assets. It has managed to raise capital via equity yet maintaining a low volume of shares. The share price is one third of last years, yet with no adverse fundamental reasons, apart for the waiting time of product development. At the last price of 12.5cents, its Price/NTA is about 1.156 which is extremely cheap, indicating there is no price premium for any of the products.
Suggestion: Buy at 12c or below.
Wednesday, May 28, 2008
TLS - Rate of Change
A request was received to look at TLS with the Rate of Change method. The result is shown in the graph below of the Rate of Change (7 days) with the Last Price of Telstra on a daily basis up to today (28/05/08).
The number of days for ROC was chosen such that looking on past events, it seemed to be a reliable indicator. Looking at the current trend, the ROC reached 0% and is on the way down. If the ROC becomes negative and remain so, then there would be a sustained drop in the share price.
This may be the time to risk opening a short as the position would be favourable if the ROC becomes negative. Those with short open, should be waiting positively in anticipation of further drop.
The number of days for ROC was chosen such that looking on past events, it seemed to be a reliable indicator. Looking at the current trend, the ROC reached 0% and is on the way down. If the ROC becomes negative and remain so, then there would be a sustained drop in the share price.
This may be the time to risk opening a short as the position would be favourable if the ROC becomes negative. Those with short open, should be waiting positively in anticipation of further drop.
Monday, April 21, 2008
Brief - CBB - Cordlife Limited
Brief - CBB - Cordlife Limited
The dramatic fall from $0.85 in July 07 to $0.27 recently has prompted this quick review / analysis. (Have not been too frequent in blogging due to Computer upgrade - hope to pick up soon). Within this period of sharp decline, there had been no bad news from the company.
CBB is a cord banking business. Its business is in storing umbilical cords blood for the purpose of using for future treatment or stem cell therapy. CBB has its main operations in Singapore and is active in the Asia Pacific region. Offices are found in Singapore, Australia, Hong Kong, Thailand and the Phillipines and just opened in Indonesia. This is a relative good foreign market exposure.
According to the Dec 07 report, CBB is virtually debt free, with $9.5mil cash. Its current ratio (receivables/payables) is a healthy 1.6, like that of a big cap industrial stock. This is not a bio-R&D company but a cash generating business. Its NTA/share is $0.162 and comparing with today's price; the price/NTA = 1.66, quite low indeed.
Unlike research biotechs, CBB does not have the promise of a blockbuster drug. Although its financial position seem to be good at the moment, it is still making a loss. Its last half year operations loss is $2.2m. Its cash burn rate is about 4.3 half years or slightly over 2 years. Investors should expect CBB to be profitable in less than 2 years if they decide to invest.
Recommendation: Speculative buy at $0.25
The dramatic fall from $0.85 in July 07 to $0.27 recently has prompted this quick review / analysis. (Have not been too frequent in blogging due to Computer upgrade - hope to pick up soon). Within this period of sharp decline, there had been no bad news from the company.
CBB is a cord banking business. Its business is in storing umbilical cords blood for the purpose of using for future treatment or stem cell therapy. CBB has its main operations in Singapore and is active in the Asia Pacific region. Offices are found in Singapore, Australia, Hong Kong, Thailand and the Phillipines and just opened in Indonesia. This is a relative good foreign market exposure.
According to the Dec 07 report, CBB is virtually debt free, with $9.5mil cash. Its current ratio (receivables/payables) is a healthy 1.6, like that of a big cap industrial stock. This is not a bio-R&D company but a cash generating business. Its NTA/share is $0.162 and comparing with today's price; the price/NTA = 1.66, quite low indeed.
Unlike research biotechs, CBB does not have the promise of a blockbuster drug. Although its financial position seem to be good at the moment, it is still making a loss. Its last half year operations loss is $2.2m. Its cash burn rate is about 4.3 half years or slightly over 2 years. Investors should expect CBB to be profitable in less than 2 years if they decide to invest.
Recommendation: Speculative buy at $0.25
Friday, March 14, 2008
Brief - Atcor Medical - Initial Coverage
Brief - Atcor Medical - Initial Coverage
This is a quick note alerting readers about initial coverage on Atcor has commenced. The coverage is done by Taylor Collison Sharebrokers and the report can be seen at Atcor's website.
The report is very thorough with a full DCF analysis as well as a good survey of competitors, both local and international markets, in which Atcor operates. (A DCF analysis estimates future year profits and brings it back to today's current value, hence giving a price for the company). According to the DCF, ACG is valued at $0.20-$0.27 and is currently very undervalued. Current price is just $0.05.
Have a look at the report - it is quite impressive in terms of amount of detail.
PS I own shares in ACG. My analysis on ACG is in this blog in Feb 2007.
This is a quick note alerting readers about initial coverage on Atcor has commenced. The coverage is done by Taylor Collison Sharebrokers and the report can be seen at Atcor's website.
The report is very thorough with a full DCF analysis as well as a good survey of competitors, both local and international markets, in which Atcor operates. (A DCF analysis estimates future year profits and brings it back to today's current value, hence giving a price for the company). According to the DCF, ACG is valued at $0.20-$0.27 and is currently very undervalued. Current price is just $0.05.
Have a look at the report - it is quite impressive in terms of amount of detail.
PS I own shares in ACG. My analysis on ACG is in this blog in Feb 2007.
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