If I said “location location location” to you, what comes to mind? I’m sure you probably said real estate and you’d be right of course. Buying the right location has proven to be the single most profitable lesson to learn in real estate. When it comes to buying Canadian stocks it’s not about location, but rather about “volume volume volume”. Now if you are unfamiliar with that message as it applies to the stock market, then let me explain.
Someone gives you a great stock tip, or you saw some recent news and want to buy the stock, I say STOP! Unless there is volume, and I mean a lot of shares trading on a regular basis, the stock tip you heard or the news story you read about, can get you trapped in an illiquid stock. Trading a stock properly works best when a lot of shares are trading.
Now, let me give you three quick Canadian examples of what I mean. First, I personally use Stock Research Portal to find all my mining drilling news releases. I use it for many reasons, but mostly to get the drilling and discovery news in real time. Then I want to see how the market reacts to that news. And let’s be very clear, buying into the news too early doesn’t always work.
Let me show you just three Canadian company examples, 2 stocks had news that affected the volume and one that had news but no effect at all on the volume.
Tuesday August 11, 2009 @ 10:19am – Pele Mountain Announces High-Grade Gold Discovery at Its Highland Project
(GEM.V) opened that day at .10 but the news didn’t hit until 10:19am and there was no immediate reaction. Then the volume started. A stock that barely trades 100,000 shares in a day was now doing almost 2 million shares. It was the volume that moved that share price up 50% to .15 not the news on it’s own. You see, a news release is just a collection of words on paper, and until the traders trade it, it stays a story unheard. In this case it was heard, the volume tells me that. In fact, it touched .17 the next day or 70% more than just the day before.
Simply by paying attention to the Stock Research Portal for drilling results could have made you some serious money. Now here’s another example.
Wednesday August 12, 2009 @ 8:30am – Lydian Drills 82 Meters at 2.5 g/t Gold and Extends 1M Ounce Resource at its Amulsar Discovery in Armenia
(LYD.TO) opened at .55 up from the previous close of .41 and it opened that high because the news was released prior to the start of trading at 9:30am, so there was already demand. LYD barely trades 100,000 shares on a normal day, this day it traded almost 2 million shares and that volume drove the price up to .88 . Had you bought the pullback in mid morning, after confirming the volume was in play, you could have bought at .60 and still enjoyed the run to at least .80 for a profit of 33% . Oh darn just 33% in a single day!
As a Canadian day trader, I could have invested $ 10,000 on Tuesday and made 50% on my money. On Wednesday I could have reinvested my $ 15,000.00 and added another 33% to that, in essence doubling my initial $ 10,000 in just two trades over just two days.
In case you are getting crazy with excitement and I can easily see why, let me also show the other side of that. Here’s another Canadian company news release.
Wednesday August 12, 2009 @ 8:54am – Cartier Reports High Grade Gold Results on Rambull: 27.72 g/t Au over 0.30 m
(ECR.V) opened at .175 actually half a cent below the previous close, and it only traded 9,000 shares all day. In fact that is far less than their daily average. So what gives here? Val D’Or, Quebec is very hot right now for mining, the company only has about 20 million shares outstanding .. this should have taken off .. should have, but didn’t. In time, the news will find the right investors and with so few shares available, the share price could easily triple in a day. But nothing ever happens without volume!
THE LESSON: Never buy the news alone, wait for the volume to confirm the interest in the news. It’s true, you may have to buy the stock at a higher price, but at least you won’t jump in too soon, and get trapped with no easy exit.