Trade case study - Toyota TM
Here's my TM trade, which nobody can claim is a penny stock.
Elements of the trade:
(1) Toyota is a major company and one that PMs would feel comfortable bidding on. In uncertain times, nobody wants to be known as the idiot who bet on some microcap. That can lead to getting fired.
(2) The UAW walkout meant that Toyota could have increased sales and capitalize on the Big-3's pain.
(3) Going against the above was the deteriorating, but still good macro picture. So I decided that doesn't matter for my timeframe. It would certainly matter for longer timeframes.
Understanding the chart:
(4) The first green vertical bar is where I bought TM. The main trend is the blue line and it is going up. TM showed strength at the trend. It even went above the two short term trends in one quick move, which is always a positive.
(5) Very important - understanding the timing indicators at the bottom - The top one is the daily RSI. It is mildly moving up, which is what you want. A nice steady pace. The two bottom ones are longer term modified RSI and longer term context sensitive RSI. They are both oversold, which is inducive to big bounces.
(6) The thing to understand about context sensitive RSI is that your main signal is it crossing the midline, then everything else that you'd look for in the RSI. In addition to the bigger context above, the trade was triggered by it (yellow panel) crossing above midline.
(7) The purchase price was 165. The stoploss was at the short term trend (black line) which was slightly below the low of the day before (as it should be). It was at 161.
(8) You made the plan - let it ride. Don't mess it up because of a small pullback.
The exit was the red vertical bar. Almost everything I said above reversed at that point. Namely:
(1) All RSI metrics were overbought, so it was vulnerable to sharp pullbacks. Little risk of not being able to get back in if I changed my mind.
(2) It fell below 2 moving averages - again the reverse of the buy conditions.
(3) The context sensitive RSI crossed below the midline.
From entry, 165 to exit ~192, it was a 16% gain in very short time on fairly low risk situation.
Now if the bigger picture had looked different and the red line was flat, this would have been the perfect setup to short the stock. But the redline is rising and it is not wise to go against that trend, unless you have exceptionally good reasons. Even then, it is still best not to do it.
2nd green line - Pretty much a return to the conditions mentioned in the first purchase. Reread that section and see how pretty much everything I said applies to this one too.
But the real lesson is that I did not pull the trigger because it was right before Toyota reporting their earnings and the market sentiment was very negative. Even companies that had been beating their numbers were falling and on top of that the UAW walkout was resolved. So I didn't buy and you can see what happened.
And that is another important lesson. One can be systemic about the trade or be discretional. A hybrid model, like I do, has its own challenges. At times like this, I remind myself that there are always other opportunities.
 |
