One of the main mistakes made by retail investors revolves around limiting themselves to analyzing price action and assuming that is all there is to it. For example, they see an asset (Chinese or otherwise) which went up continuously for 4 months and assume that this price action is extraordinarily bullish, with FOMO (Fear Of Missing Out) being but a step away.
Are they right?
The correct answer is that we cannot know with the limited information that has been provided thus far and in terms of missing elements, the volume dimension stands out. Cryptocurrencies represent a textbook example to that effect, with the overwhelming majority of altcoins that can “pump” by double or even triple-digit daily rates doing so at abysmal volume.
As a bit of an extreme example, let us assume two friends launch ChinaCoin, with 100% of the coins being pre-mined and owned by them, let’s say a grand total of 1,000,000 ChinaCoins. To put it differently, just two entities own 100% of the supply. The next day, two transactions take place, with the wives of our two friends each buying one ChinaCoin and paying $1,000. As such, a “market price” of $1,000 is established and the market capitalization of ChinaCoins would now be 1,000,000 multiplied by $1,000, in other words (insert Dr. Evil photo) one billion dollars.
Needless to say, the market cap in question is ludicrous in light of the fact that there is no volume to back it up, with the only two transactions which have ever taken place being represented by the wives of our two friends purchasing one ChinaCoin each from their husbands. An ignorant bystander who just so happens to hear about this “hot” new coin and buys one for $700 from one of the friends, thinking that he got a bargain in light of his acquisition price being 30% lower than the so-called market price will be in for a bit of a surprise when he tries to sell and notices that literally nobody is interested in buying, even if he is willing to sell at a loss.
Of course, this is an overly simplified example.
But, on a fundamental level, make no mistake: investors who disregard the volume dimension when it comes to Chinese assets or any other asset will most likely be in for a rude reality check sooner rather than later.
Does this mean there isn’t enough volume behind Chinese assets?
Of course not.
It simply means that you as an investor or trader have to do your own meaningful research and determine, on a case by case basis, if trading volumes are adequate enough to warrant getting in. For example, a Chinese share trading on the NASDAQ will most likely have reasonable enough volume behind it, even if it will come nowhere close to NASDAQ superstars such as Apple. One trading at let’s say an obscure OTC platform… considerably less so.
Again, the burden of figuring out the volume equation lies exclusively on your shoulders as an investor. Furthermore, there is no such thing as a “one size fits all” analytical framework because a lot depends on your particularities.
- How large of a trading position are you interested in establishing? If you only want to invest $100, then pretty much any (Chinese, in our case) asset trading on a half-decent platform should have more than enough volume to be a perfectly acceptable option. If you want to invest $10,000,000 on the other hand, you will have no choice but to become selective because upon closer inspection, you will realize that when it comes to many assets, you essentially become the market with such position sizes
- Are you willing to hold on to positions for an extended period of time, until you get a fill at your desired price rather than having to accept a major haircut so as to meet liquidity? Being forced to sell a low-volume asset quickly can oftentimes prove to be a recipe for disaster
- Then again, perhaps you have a strategy in mind which can make low-volume asset trading work in your favor. At the end of the day, your bank account will make it clear whether you were right or wrong and in the world of investing/trading, the phrase “there is more than one way to skin a cat” makes perfect sense
The bottom line is this: our article has not been written with the goal of planting fear in the minds of those who are thinking about investing in Chinese assets. We are simply pointing out that when it comes to Chinese assets more so than as far as more established ones are concerned, it makes sense to take the volume dimension very seriously. You can do that through anything from simply including volume-related research in your arsenal for defensive purposes to going on the offense and finding way to profit from low-volume opportunities.
Also, our goals in no way revolve around trying to paint volume as some sort of a miracle variable, one that will bring guaranteed success your way if tackled properly. We would love nothing more than to be able to “pitch” investing in or trading Chinese assets as a surefire way to generate career-defining profits but that is just not the case as far as the former is concerned. The latter is most definitely true, with career-defining profits being on the table but (and this is the elephant in the room in terms of nuance) only for those willing to put in the work required to meaningfully “get” Chinese assets, with the volume dimension representing an important angle.
Should you be interested in doing just that, the ChinaFund.com team is only a message away. Before contacting us, feel free to read the About Us section of our website to find out what our team is made of and the Consulting page for examples of what we can do for you and/or your organization.