In investing, we can lose money with good stocks as well as it can happen that we earn money with bad stocks.

Daytraders know this all too well, but even the hardcore long-term value-investor can get burned by unfortunate market timing.

The first time I heard about the metric I am going to describe was in the books of André Kostolany (you can find more on him in my other essays).

The general idea goes like this:

• Kostolany says that there is a correlation between share price and trading volume.

• As well as that there are two types of market participants: the "hard-boiled" and the "tremulous".

From these two postulates he derives his "Kostolany-egg" which describes a full price and volume cycle of a stock:

1) The price is (very) low and the stock trades at (very) low volumes. Thus the "hard-boiled" investors start buying the share. They think that the share is inherently more valuable than its current price.

These investors have:

a) cash

b) fantasy (they have a compelling story why the company will prosper in the future)

c) faith and patience in sticking to this story - as long as the relevant considerations remain true (cf. my article on Kostolany's "5G's")

2) The few "hard-boiled" investors cause the trading volume to slightly increase. Relatively to it, the share price increases substantially: the "hard-boiled" are ready to pay this higher price as they are convinced that the company is worth much more.

3) These rising prices start making the stock hotter: the general public now starts having an eye on this stock that seems growing out of the ashes. The "hard-boiled" however already filled their depots. Now it's those freeriders's who startbuying more and more of the stock. Both trading volume and stock price are increasing substantially.

4) At some point of time, the whole scheme starts overheating: by now "everybody" has bought shares of the stock (causing the share price going through the literal "roof") - and the majority of the holders are the many "tremulous". The "hard-boiled" already killed their position as they see the stock becoming overpriced (and are aware of what will folow). As there is nobody out there to buy the stock anymore, the trading volume starts to slow down. As the stock gets less liquid, and the "tremulous" start selling (because they want to cash-in on the price development since they entered the position), the share price starts going down. Many sellers, few buyers.

5) Causing a chain-reaction of many wanting to sell the stock and few wanting to buy, the trade volumes increase but the trade-off is that the share price goes down substantially.

6) Going full circle: At some point of time, the trade volumes go down as well and the share price hits a low too. The circle then starts again at 1).

What can we learn:

1) It is important to keep an eye on trading volumes (nota bene in "# of stock traded") and in particular on the leading stock exchange of your stock! If e.g. you bought a Russian/Brazilian/South-African ADR, you have to observe the trading volumes on the Moscow, Sao Paolo resp. Johannesburg stock exchange.

2) Trading heuristics: Buy during phase 6 and phase 1; hold in phase 2; sell in 3 or 4 (but before it becomes 5); stay away from the stock in 5.

3) The "Kostolany-egg" is not a magic bullet for optimal market timing (which again is something that looks nice on paper but is close to impossible to carry out in praxi) - but it can be used as an indicator whether it makes sense to buy/hold/sell/wait, in particular with further information, KPIs and metrics.