Some time ago I decided that I ought to look into the possibility of trading “Pump and Dumps” on Penny Stocks. At that stage I became disillusioned by reading too much negative press on the impossibility of benefitting if you were not an insider – the argument being that you had to be buying quietly during the low volatility period, months ahead of the pump with the benefit of inside knowledge – in other words that you needed to be one of the promoters.
And by the way, penny stock movement is not all of the pump and dump variety. Much of the movement I have observed recently has been based on fundamental factors – announcements regarding financial results or developments in the relevant corporate’s business. But whatever the reason for the rise (and the usual subsequent fall) the quest is to find whether you can ride one or the other algorithmically.
My interest in penny stocks is based on my belief that a trader (as opposed to an investor) needs to benefit from some well-defined anomaly in market structure. Rather than uselessly predicting based merely on indicators.
Let me explain. For many years I benefitted from the market anomaly of IPOs in world markets – particularly in the US. There was a well-worn, well recognised, and repeated pattern from which it was possible to make a great deal of money. Provided you had access to stocks at the offer price. Which I did for many years, as an active trader.
The real anomaly was that IPOs are priced to go. And there was (and probably still is) accurate research as to which deals were hot and which were not. Often as not your broker could give you guidance as to the state of the underwriter’s book.
The US was always the most reliable and transparent market. Woe betide those who punted too large on hyped issues by non-Bulge Bracket houses in Hong Kong or Egypt. Even US Bulge Bracket players brought some appalling and ill supported deals in non-US markets.
So, the game was to stick mostly to smallish, hot NASDAQ deals in the US, where the better managers would invariably price the deals to go. If the deals did not “go”, major houses would support the price on the first day so that it was rare to have to take a loss.
It became (for me at least) a systematic endeavour: here are the rules, go play. And it worked very well. Unfortunately, nowadays it is far more difficult to open accounts with the big houses (post 9/11) and even more difficult to get allocations of stock without having large amounts of capital deposited with the lead manager.
Anyway, back to penny stocks and Timmay. As some less respectful commentators like to call the venerable Mr Sykes.
Mr Sykes appears to have been a successful trader in penny stocks – presumably he still is. His major pre-occupation these days is to offer a truly bewildering variety of courses, trading rooms, scanning software and other materiel aimed at the retail crowd.
For my personal take, Syke’s materials are rather long on hyperbole and rather short on detailed instructions.
Nonetheless, if you take from him a few basic ideas, you can begin to build a set of rules for yourself which you can translate into an algorithm and then back test on real market data.
I have chosen to use the on-line back testing facilities of Quantconnect.com since I am familiar with Python and because Quantconnect has two other important advantages. They provide very high-resolution data for US equities (including de-listed stocks) and they provide facilities to automate trading of your algorithm through Interactive Brokers.
Their latest data offering is to provide bid and ask prices, which should enable even more accurate back testing especially when data on a second by second basis is used. I have yet to fully explore this facility.
Listening to Timmay can be a painful experience – he majors on showing off his glamourous possessions and his style is not suited to this particular quiet and academic practitioner. I have little desire or use for a Lamborghini or a watch costing upwards of $50,000. I do not need to be told to study the markets or to work hard if I want to rise to the great heights Timmay has achieved.
Nonetheless there is value to be had in sifting the wheat from the chaff. While Timmay does not quantify any of his systems to the extent they could be coded and fed to a computer, he does at least outline in very broad and general terms what it is he is looking for. While he does not detail an exact method to choose and execute entry and exit points, he does at least give many examples of where he and his followers have chosen to place trades.
The great majority of Timmay’s trades are intraday. He and his mates are day traders. And for most people this would be an immediate turn off on any number of grounds.
But this is where patterns come into play and where the analogy with the IPO market is helpful. If you have some idea of the rules, you can begin to look for repeatable patterns from which you can systematically profit.
IPOs worked on one set of rules, penny stocking seems to work on another set.
Penny stocking is going long on the upward momentum of the pumps and short on the downward momentum of the dumps.
It is none other than our old friend the trend follower but on an intraday scale. There are a variety of entry and entry points intimated by Timmay: buying dips, buying strength and so forth but the reality is you need to start looking at the charts yourself and deciding how to explain the patterns to a computer.
An interesting starting point is the daily stock screener. Find out the biggest movers in penny stocks yesterday and consider the stock chart in detail. How did the stock behave in the days and weeks before the pump? How did it behave minute by minute on the day (or days) of the pump?
Patterns do begin to emerge. One such pattern is days or weeks of very low volatility and volume, followed by a day when the stock opens up by a large percentage on greatly increased (and thus tradeable) volume.
I have already back tested buying at the open the following day and exiting at the close. That is a disastrous policy and I do not believe it will be much improved by scaling out or profit taking throughout the day. Or indeed by scaling in. Although I will be testing both such methods.
Closer observation of Timmay and his mates reveal that they create watch lists by inspecting past data and then they see whether any of these possible plays burst upwards on volume in the pre-market or in the morning trading session. Then they jump in, follow the trend, and jump out when some sort of mental target is reached. Perhaps these targets are made up on the spur of the moment, perhaps they are ascertained at the outset of the trade. Ditto the mental stops to get them out when it goes wrong.
The patterns definitely exist, and they are repeated over and over again. I leave aside the possibility of shorting – personally I couldn’t be bothered with borrowing the stock and I am uncomfortable with the risks, given the extraordinary volatility.
So, my research for the present will focus on the long trade. And for that you need very high-resolution data because you are going to have to back test day trading and then forward test using paper trading in real time. On daily bars you have no idea what happens during the course of the day and you can not prepare or use intra day indicators to give you the signals you need. Or to give you accurate entry and exit points.
And so back to Quantconnect and its high-resolution data. Once you believe you have understood Timmay’s patterns, it is time to put them to the test.
If you can prove to yourself that your back test is reasonably accurate and your algorithm without error then you should be able to make your own mind up as to whether Timmay is the real Mc Coy or merely an effective marketer and self-promoter.
My suspicion is that Timmay is a bit of both. He may not be my style, but I can see that there might be method to be had from his hitherto ill quantified and vague methodology.