If you haven’t yet heard of Tom Ronk, you will. He was featured in a 2007 Bloomberg Special titled “Phantom Shares,” which detailed the problem of naked shorting and Ronk’s efforts to address it. Naked shorting, the practice of shorting company shares without first having to borrow them, in effect creates counterfeit shares and dilutes share value. Ronk is the owner of Buyins.net, a research firm that compiles short sale time and sales data, and publishes a proprietary SqueezeTrigger, or short-squeeze threshold price level, on all U.S. stocks. He also designed and developed the Global Automated Trading System (“GATS”) and trades more than 120 proprietary trading systems in a host of markets. Ronk has 19 years of trading experence, and as a registered representative of a major brokerage firm, Ronk managed more than $150 million in equity accounts. He is a registered investment advisor in the state of California, a registered commodities trading advisor and the principal of Century Pacific Investments.
When asked for his most important trading component or consideration, he sent me a list of 11 “trading system must-have parameters.” Un- fortunately, there is only room for one key idea here. When queried, Ronk picked No. 7 or 9 on his list, “but I would do both if you can.” Given his talent for brevity and focus, here are both:
“Index direction confirmation: Since up to 75 percent of a stock’s move is index related. It is crucial that confirmation techniques are added to equity strategies that only allow the strategy to fire in the direction that the index is moving or expected to move.
“Reward-to-risk ratio: We want our trades to have at least a 3-to-1 reward-to-risk ratio. This is determined by setting the bracket orders on stops so that if we have a 5-percent downside risk there is a 15-percent upside potential or higher.
” In tracking Ronk’s SqueezeTrigger shortsqueeze candidates during the past few months, I observed how quickly they can move. According to research by Bespoke Investments, the most heavily shorted stocks have led in rallies for the past five years, which means that when markets are rallying, they can really rocket. But they are also volatile, so a disciplined system of taking profits, exiting trades and using effective stops is essential. Ronk’s two points are critical to success with these stocks or when trading any high-alpha, high-beta stocks ,especially in volatile markets.
When asked for his most important trading component or consideration, he sent me a list of 11 “trading system must-have parameters.” Un- fortunately, there is only room for one key idea here. When queried, Ronk picked No. 7 or 9 on his list, “but I would do both if you can.” Given his talent for brevity and focus, here are both:
“Index direction confirmation: Since up to 75 percent of a stock’s move is index related. It is crucial that confirmation techniques are added to equity strategies that only allow the strategy to fire in the direction that the index is moving or expected to move.
“Reward-to-risk ratio: We want our trades to have at least a 3-to-1 reward-to-risk ratio. This is determined by setting the bracket orders on stops so that if we have a 5-percent downside risk there is a 15-percent upside potential or higher.
” In tracking Ronk’s SqueezeTrigger shortsqueeze candidates during the past few months, I observed how quickly they can move. According to research by Bespoke Investments, the most heavily shorted stocks have led in rallies for the past five years, which means that when markets are rallying, they can really rocket. But they are also volatile, so a disciplined system of taking profits, exiting trades and using effective stops is essential. Ronk’s two points are critical to success with these stocks or when trading any high-alpha, high-beta stocks ,especially in volatile markets.
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