Short-term I see a volatile market ahead for the remainder of the year. Risk is high. Times like these make or break traders. So, my advice is to dial back your risk. A little risk goes a long way.
Welcome to Alpha Dawg! My almost daily note about global self-directed investing and trading. You get all my trading ideas, analysis, and novel ways to manage risk in these volatile markets. I hope you enjoy the content. I aim for about 500 words or a 2 minute read.
Alpha – noun
abnormal investing returns, the edge of a strategy in excess of market returns
That said, now is a good time to put risk to work in the energy sector. Specifically, I’m talking about the oil field services sector.
Sky high oil prices inevitably lead to increased activity in the sector. Indeed, drilling companies offer a decent chance to capture some alpha. Without doubt, I like a good tail wind to help boost the odds of success. In this case, the Baker Hughes rig count is a good finger in the air type test. Rig activity jumped 311 compared to a year ago. Green light!
You could trade the Vanek Oil Services ETF (OIH) or pick and individual name. I’m going with a mid-cap from the Canadian energy sector.
Ensign Energy Services
Ensign Energy Services Inc. (ESI-to) is a publicly traded Canadian company that provides oilfield services globally.
After an unfortunate credit event at the outset of the pandemic, Ensign had to drop its dividend entirely. Of course, this lead to forced liquidation by dividend funds, which held a ton of their stock. Downward selling pressure crushed the stock.
Fast forward a few years, and management appears to have righted the ship. The latest quarter revealed a profit and positive cash flow.
Risk Management
Managing risk of ruin is THE hardest part of trading short-term or investing long-term. Style is irrelevant if you blow up your account.
At the top of this post I mentioned that volatility is high right now. Therefore, I’m going to dial back my risk by trading smaller positions. This way, if the trade goes sideways (which it might), I’m already trading smaller size than usual. One one step ahead of risk of ruin.
Alpha Dawg has $50,000 in his trading account and is willing to risk 1%. So, knowing where my stop loss is and how much I want to risk, I calculate how many shares to buy. In this case, I’m risking $500 to make $1,500. 2 to 1 is not a great risk/reward setup, but I think the probability of success is about 70%. And I don’t want to be greedy.
Expected Value Breakdown
Trade is profitable (70%) – $1,533 – EV $1,073
Trade stopped out (30%) – $500 – EV -$150
Expected value of this trade is +$923
Alpha Dawg goes long 1,600 shares of ESI at $4.79. Stop loss at $4.48. Take profit at $5.25.
Conclusion
Without doubt, the energy sector is catching a ton of investor capital fleeing the tech sector. I think the energy rally is in full bull mode. The trend is your friend. Until conditions change, don’t fight the trend and get long energy.
Are you looking for stocks with strong fundamentals and the potential to grow in the future? If so, checkout my portfolio page.
Thanks for reading.
Disclaimer: The content on this webpage is intended for informational and educational purposes only. No content on this webpage is intended as financial advice. The publisher of this website does not take any responsibility for possible financial consequences of any persons using the information in this educational content. Trade and invest at your own risk. Trade your own view.
