When you make 10 or 20% in a stock in 1 day, you can really start to like that stock and assume that there's more coming. With C&D trades which I have noticed and traded for years even though I prefer higher quality stocks (I believe in taking what the market offers), I have found they can move incredibly, 300-400% in a run or 20 to 100% in a day, but they are there for a reason and if you want to profit from them, you have to understand the reason.
In my experience in trading several seasons of Cats and Dogs, they tend to pop up when bullish sentiment is high and especially after an impressive move in the market. People who saw the late July decline and lost money on it are gun shy. This is also part of the psychology of a bear market rally. To get these gun-shy traders back in the market, they need to be impressed, they need to have their emotional buttons pushed and feel the emotion of greed. Greed is much harder to create then fear is to overcome, so as I said, they need to be impressed.
The Cats and Dogs almost always have clear accumulation so its my opinion that as I explain this emotional phenomeon to you, Wall Street understands it 10x better then I do, after all, they accumulate these cheap stocks and make huge profits on them. They know once they get a trader to feel left out, that trader's greed will kick in. Human nature being what it is, we all like a bargain. If you are really honest with yourself, how would you feel about buying a stock that has already run for several months and is up maybe 50-200%? Or how would you feel buying on a breakout day when the stock is already up 15%? Probably not too good and that's what happens to these traders, they search for the bargains and Wall Street gives them clues of where to look by flashing volume surges. Momentum traders watch and scan all day long for volum surges because the mistakenly believe that what they are seeing is smart money buying the stock. Smart money doesn't let you see what they are doing, they certainly don't announce it with a 1000% volume surge and drive price 15% against their entry, but they do know what average traders think.
So the Cats and Dogs look like a bargain, they are flashing big volume, traders think Wall Street is buying and they jump in to a $1-$5 stock rather then a $50 or $60 stock. These moves as I said, happen fast and they can be huge, but on the way up, Wall Street who bought the stock when no one was looking and no one cared, is selling in to that strength the entire time.
This is why I have a personal rule that if a C&D stock gives me a return of more then 10% in a day, I will take either partial or complete profits. Ideally I'd like to let the stock run and see if I can get a 15% gain to turn to a 300% gain, but I know these are not the next Microsofts, they are a play on traders emotions and the proof is in 3C where you can see then accumulated when they are cheap and no one cares.
So I posted EXM and DHT this afternoon, I thought EXN probably has more to go, but DHT has had a pretty good run.
From the time I posted these two to the close which was less then an hour, look what happened in EXM...
This is why I take those partial profits no matter what or even total profits. IDeally you can make enough to take your original investment completely off the table and only have profits at risk with a tight trailing stop, those do come around.
I don't think we can complain though about making 13% in a day, that's more then most hedge funds made all last year. In any case, just understand what the trade is, why it's there and you should be able to make some nice, quick profits.
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