A number of your recommendations lately involve stocks with very low average volumes. I would assume you guys buy and sell a lot more shares than an average investor like me. How do you decide on how many shares to buy with a stock [with average volume 100K or less?]. Do you have to buy in pieces so that you don’t drive the price way up with a large order? Do you have to do the same when you decide to sell?

It is harder to trade stocks with below average volume and we like to keep those to a minimum because of the lower liquidity. The primary consideration on liquidity is the ability to get out of a position if things start to fall. If volume is less than 100,000 shares on a 50 day average, there could be a problem if some bad news hits and you hold the stock. There may be no buyers no matter what size block of stock you are looking to unload. To a certain extent it is true that a smaller position would be easier to sell than a larger position in any stock whether it was liquid or not. The exception is a very small lot. The problem with illiquid stocks is, as stated, there simply may be no buyers if bad news hits. As for any position whether options or stock, we don’t want to be 10% or more of the market.

With that in mind, for moving into those stocks which tend to trade on below average volume we look for the same strong volume breakouts that we require for stocks that typically trade on above average daily volume. That breakout on strong volume as it moves through the buy point shows us there is demand, and it also gives us cover to put in our orders without skewing the market. Of course if we put in an order that is 50% of the volume, it will skew the stock price. We do not, however, put all of our eggs in any one of these plays so we don’t try to own the market on that stock anyway. If the pattern, accumulation, price/volume action, etc., look good conditions are optimized for a breakout that can lead to the successful trade which helps minimize the difficulty of trading such stocks. Strong, above average volume shows us that more than the usual number of buyers want the stock. If the pattern is strong and accumulation is strong (we typically look for very strong accumulation in these), then when we see the breakout on very solid trade that gives us more confidence that the stock will give us the move we are looking for without running into trouble that would make it harder to get out on the sell side. In other words, we would be selling when we want to sell as opposed to when we have to.

That, of course, is not always the case, no matter how strong the pattern and breakout are. Thus, on the sell side it can be harder. We sometimes see the spread widen when a sell order is put in even at the big. We never load the boat on these plays, so when dropping 2K shares or so it is not running the market on the stock. We can typically get out in one or two sells in these instances unless the stock just turns over and tanks. Remember, however, that when a stock starts a plunge, it typically will bounce in recovery. It is much easier to get out at that point than during the ‘panic’ lower where it invariably seems you get out at the low. By being a bit patient, it also makes you more rational and not blindly rushing in. Stocks typically rebound the opposite direction after the initial surge, and that gives us a better price to get out as well as an easier time finding a buyer for all of our shares.