Unless AVZ is permanently suspended, the risk was actually much higher when it was at 37 cents earlier this year. To get back to 37 cents requires roughly 300% return.
There are several mindset traps that the market will use to extract large profits from inexperienced and/or emotional traders:
1. Excessively large buy orders that make it very difficult if not impossible to act on when a stop loss is hit. When price starts to fall, they are like wildlife frozen in their tracks when starring into a car's headlights. The emotional stress of burning hundreds of $100 bills is too much to act on. Traders try to ignore the increasing capital destruction and focus on company news and HC forum talk. Placing a $300,000 bet at $0.30 would be now only worth $130,000.
2. Many stocks that have significant increases like AVZ (still up 306% over the last 12 months), are often prone to a parabolic-type chart pattern where the left side downside can be nearly as large as on the right side. Traders trying to trade short (via CFDs or borrowed stock) the left side of the curve get burnt because they are trading against a rising stage 2 trend. The converse is now occurring with AVZ in a stage 4 downtrend.
3. No knowledge of basic technical analysis. Experienced traders usually look at a weekly chart first, then finally a daily chart before buying. Traders buy into strength such as 6-month or 12-month new highs. Very few try to catch falling knives that a well below a declining 200-day moving average.
4. Risk of losing everything when a company runs out of funding. These situations almost always exhibit a similar chart pattern.
5. Lack of diversification. Having a portfolio of lithium stocks will likely under-perform over the longer-term. A trader may have lucked out with a 1,000 percent return on one stock, but they usually end up giving it all back and more by placing large bets on highly speculative shares. Risk of ruin is a mathematical calculation used by professional gamblers. They also observe The Kelly Principle.
6. Not having a macro index filter in place to know when a portfolio should be largely in cash or stocks.
7. Fundamentals have their place, but they need the backing of bullish chart technical setups. Some of the world's most successful traders ignore newspapers, financial media coverage, and fundamentals. They use automatic trend-following systems that largely rely on price and volume. These automatic buy systems would have detected all lithium mining stocks back in 2016 and 2017 just as they were starting to trend up.
AVZ today printed a new low of 12 cents. Any short-term price increases such as 13 to 15 cents are within the boundaries of a downtrend channel. Momentum is still strongly to the downside.
