Biotech Short Trade Closed With 20% Gain
The biotech sector was shorted over the last week and the trade closed out on Friday 3/8/19.
We shorted by going long the leveraged inverse fund LABD at the location shown. There was a slight draw-down of less than 1% before LABD moved higher.
It was a modest trade with a gain of nearly 20%. However, the more important part was the gain relative to the amount risked.
Although the actual low occurred after the entry, it can still be used for illustrative purposes.
Let's say you’re managing a modest (corporate) account of around $5-Million and decide to risk a tiny portion of this account on the trade. We'll put it at $10,000. This means that you would have purchased about 62,500 shares of LABD.
With an R-Gain of 22.47, your $10K (risk) now becomes nearly a quarter million dollar gain at $224,700 within about four days time.
The objective in the markets is to minimize the risk and minimize the time spent as well.
In the case of the LABD trade above, both objectives were accomplished.
Obviously, the corporate trade scenario is an idealized presentation.
However, the fact that LABD was entered where volatility (and risk) was minimal and exited near the top of the move is proof in itself that Wyckoff technique still applies today in a financial world choked with obfuscation and the beast of 'artificial intelligence'.
Lions and tigers and Watson ... oh my!
Putting $1.5-million to work purchasing 62,500 shares of LABD might sound extreme. What’s the difference with that as opposed to putting the same amount in SPY, SDS, or QID?
In the case of LABD, we already had the adverse move shown in the chart (February 25th) with the huge gap lower. Therefore, the probabilities of another adverse move have been reduced significantly. Never to absolute zero but low enough.
Helping the case further, once the bottom was reached, there was significant sign of demand on March 4th. The risk of another adverse move is lowered even further.
For more info on ‘adverse move’ see Tharp’s text here.