I often talk about longing OTC stocks into afternoon strength and holding for the next day gap-up. When things go according to plan, it's one of the easiest trades in the world! But what happens when things go wrong? My PHOT trade from last night is a fantastic example to learn from.
The Setup:
I bought 130,000 shares of PHOT at roughly a $0.75 average shortly after 3:00 EST, as it was breaking above the high of the day. I was using the $0.70ish low from the previous pullback as my risk level, so the brief shakeout to $0.73 didn't scare me out. The stock ripped back, closed at the high of the day, and I was feeling great about my overnight hold. I thought for sure the stock would open over $0.80 and have a great morning spike.
The Result:
Before the market opened, there was a negative article released about PHOT. The stock reacted very negatively to the article, as you can see above. PHOT gapped down, opening at a price of $0.75. People have asked me before what I do when the stock gaps down instead of up. The answer is that I get out. Because it was a new day, I was no longer using the same risk level as the previous day. Since PHOT was opening red on the day and was up so much from the original breakout level of $.467 the previous week, I felt that there would be way too much risk to hold through a potential morning panic in the hopes that the stock would recover. Based on my experiences, it is pretty uncommon to see an OTC stock quickly push back to green and continue after it has gapped down.
Although PHOT gapped down, there was a moment of strength. It tried to perk up, reaching as high as $0.756 before the real collapse began. I took advantage of this brief strength to sell 80,000 of my shares. This is where I made my mistake. Since I felt content that I had decreased my position size, I decided to give the other 50,000 shares a chance just in case PHOT recovered. I ignored my knowledge that a recovery was unlikely and decided to hold and hope for a push back to green. By the time I realized the recovery was failing, it was too late. I was stuck in a panic.
The PHOT panic was very fast and violent. Despite my mistake, I did not compound it. Rather than panic and try to sell PHOT at whatever price I could, I stayed patient. I have found that when I chase panics, I usually wind up getting executed near the bottom of them. So I held through the plunge. I analyzed the level 2 action, and when PHOT bottomed at $0.625, I actually bought 120,000 shares at $0.63ish for the bounce. I didn't make it too long with my bounce position, I wound up selling it around $0.665 just to take safe gains (in case the bounce had failed). However, I kept my 50,000 shares that I held overnight and managed to stay patient with those until I finally sold in the high $0.69s.
Trading is all about keeping yourself in predictable, comfortable situations. I failed to do this by "holding and hoping" with my last 50,000 shares. However, because I managed to avoid making any emotional decisions during this panic, I walked away with a net profit on PHOT for the day. Had I not played the bounce, I would have at least minimized my loss.
