In my last blog post I told you I wanted to break down the components that make up a successful trade… and that’s exactly what I want to show you. But first, let’s talk a little bit about block trades and why they’re important for the little guys (that’s us) to know about.
As I’ve said before institutions aren’t great at hiding stuff (some of you may disagree, but bear with me). One of my favorite recent trades, with a software company called EGAN, was based entirely off of a block trade. I really liked the way that chart was setting up because it looked like it was bottoming and it had this nice volume spike, but it still hadn’t registered on my radar yet.
So I'm still watching it the next day and a HUGE block trade goes off. Something like 400,000 shares. Mind you, this is a stock that trades for barely anything with a three month average volume of something like 72,000 shares a day! So I see that block trade go off, and almost automatically I start connecting the dots in my head, now I'm going to hack the chart:
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In my mind I know that this is a beaten-down chart. What that means is that something caused it to move below the low. You'll see, especially with small-cap stocks, when they make lows and they're trying to bottom, the goal is basically to blow out all the stops. This is a tactic used to get players out of the game and on the sideline before a big move… and that’s exactly what happened.
On the second day of block trades (another 300,000+ shares) I pulled the trigger and bought in. Now things rarely work out perfectly and EGAN dipped 2 trading sessions after I bought it… then never went down again after that. Just straight upward trends.
My average price was around $3.20 and then I bought some more at $3.40, It dipped down to $3.39 and then it hit a high recently of $5.22 and of course what happens when the stock gets above 4 bucks, someone pulls the curtain back and we find out that some private equity firm took a HUGE stake - that was the block trade.
This private equity firm wanted to create that volatility… so what they did is come in and buy about 4-5 million dollars of a small-cap equity that trades only 50,000 shares. They blew up that low, they ran the stock and then it found support at 3 again and then you had 2 days of just massive volume and this is why I always stress, volume, volume, volume. Volume speaks so much if you know how to read it and if you know how to hack the chart. You're rarely going to see a stock make a big moves without volume being essential in the equation at some point.
So long story short… I sold EGAN and made a huge profit (almost $5000 in my first move to scale out of the position)
I sold it around the 200 day moving average and it ended up going one more day and it hit $5.22, so I was a little early, but whatever. We're in this to make money, you're not going to hit every top and bottom perfectly. Take your money when you have it. It never gave me any reason to get out of it during that whole uptrend, but when it hit the 200 day a lot of times stocks run into resistance and there were other momentum indicators that I use that were flashing. If I was going to do anything different about that trade I would have scaled it a little bit better - scaling is trying to sell pieces as it goes up I didn't do that great on that one - I started to scale it but when it hit the 200 day I figured I'll just dump the whole thing.
I can trade along these big hedge funds because I know how to hack the charts. And this means I know exactly what to look for to give my trades the greatest chance of winning.
When the chart looked good for EGAN, I sat down and watched it. I was watching it for a while, which is what I like to call, stalking the chart. Through my experience hacking charts over time, I have learned to easily identify these types of behaviors and chart patterns, partly because I have seen it a hundred times. It has reached a point where I now know it is something that can be taught and thus Zero Sum Trading was born.
It may be tough to recognize these patterns at first and charts may look like nothing more than crooked lines on a page, but with practice you can learn how to hack the charts to work the trends in your favor.