“I absolutely believe that price movement patterns are being repeated; they are recurring patterns that appear over and over. This is because the stocks were being driven by humans- and human nature never changes”. -Richard Dennis (Turned 400 dollars into a fortune of at least 200 million dollars by using his remarkable trading skills). |
Archives of “o neil” tag
rss20 Wisdom Points from the Book ‘Superperformance Stocks’
If you read Jesse Livermore’s “How to Trade in Stocks” from 1940, Nicolas Darvas’s ‘How I made 2M in the stock market” from 1960, Richard Love’s “Superperformance Stocks” from 1977, William O’Neil’s early version of “How to make money in stocks” from the 1990s or Howard Lindzon’s “The Wallstrip Edge” from 2008, you will realize that after so many years, the main thing that has changed in the market is the names of the winning stocks. Everything else important – the catalysts, the cyclicality in sentiment, has remained the same.
Here are some incredible insights from Richard Love’s book ‘Superperformance Stocks’. In his eyes, a superperformance stock is one that has at least tripled within a two-year period.
1. The first consideration in buying stock is safety.
Safety is derived more from the good timing of the purchase and less from the financial strength of the company. The stocks of the nation’s largest and strongest corporations have dropped drastically during general stock market declines.
The best time to buy most stocks is when the market looks like a disaster. It is then that the risk is lowest and the potential rewards are highest.
2. All stocks are price-cyclical
For many years certain stocks have been considered to be cyclical; that is, the business of those companies rose and fell with the business cycle. It was also assumed that some industries and certain companies were noncyclical— little affected by the changes in business conditions. The attitude developed among investors that cyclical industries were to be avoided and that others, such as established growth companies, were to be favored. To a certain extent this artificial division of companies into cyclical and noncyclical has been deceptive because although the earnings of some companies might be little affected by the business cycle the price of the stock is often as cyclical as that of companies strongly affected by the business cycle. Virtually all stocks are price-cyclical. Stocks that are not earnings-cyclical often have higher price/earnings ratios, and thus are susceptible to reactions when the primary trend of the market begins to decline. This can occur even during a period of increasing earnings.
3. A Superb Company Does Not Necessarily Have a Superb Stock. There are no sure things in the market
There has been a considerable amount of investment advice over the years that has advocated buying quality. ”Stick to the blue chips,” it said, “and you won’t be hurt.” But the record reveals that an investor can be hurt severely if he buys a blue chip at the wrong time. And even if he does not lose financially, he usually has gained very little, particularly considering the risks he has taken. (more…)
Trade Like an O’Neil Disciple -Book Review
The CANSLIM enthusiasts, and they seem to be legion if the reviews on Amazon are any indication, have nothing but praise for Trade Like an O’Neil Disciple by Gil Morales and Chris Kacher (Wiley, 2010). I decided to be a little more focused and less ebullient in this post and write about a trade setup not found in the standard O’Neil repertoire. Consider this a follow-up to yesterday’s discussion about the eye of ambiguity.
The setup is alternatively described as a pocket pivot or buying in the pocket. It is “an early base breakout indicator, which is designed to find buyable pivot points within a stock’s base shortly before the stock actually breaks out of its chart base or consolidation and emerges into new high price ground.” (p. 128) The pocket pivot indicator provides direction in what might be seen as an ambiguous situation. It is, the authors claim, particularly valuable in sideways moving markets.
A major virtue of a pocket pivot buy point is that it is a low-risk entry point—relatively close to support and far enough from resistance to be profitable even if the stock can’t break through to higher highs. Or, as the more optimistic authors claim, “the pocket pivot buy point technique can get an investor into a stock at a lower-risk price point and thereby make it more possible for the investor to sit through a pullback if the all-too-obvious new-high breakout buy point fails initially and the stock retrenches, corrects, or sells off.” (p. 129)
What are the characteristics of a pocket pivot buy point? “[A] stock should be showing constructive price/volume action preceding the pocket pivot. … [T]ighter price formations, that is, less volatility should be evident in the stock’s price/volume action as viewed on its chart. The stock should have been ‘respecting’ or ‘obeying’ the 50-day moving average during the price run that occurred prior to the time the stock began building its current base. … Except in very rare cases, … pocket pivots should only be bought when they occur above the 50-day moving average. Ideally, the stock’s price/volume action should become ‘quiet’ over the previous several days, which contrasts with the much larger and stronger volume move that comes on the pocket pivot itself. On the pocket pivot you want to see up-volume equal to or greater than the largest down-volume day over the prior 10 days.” (pp. 132-33)
The authors offer a series of variations on this generic trade setup. For instance, there’s the continuation trade: buying on volume after a pullback to the 10-day moving average. Or the bottom-fishing trade where a stock, after carving out a bottom, pushes through its 50-day moving average. They urge caution if a pocket pivot is too extended from its 10- or 50-day moving average when it begins its move or if a stock has been “wedging” upward instead of drifting downward before a pocket pivot. As they write, “context is everything.” (p. 162)
This setup is certainly not a revolutionary breakthrough in the world of technical analysis. In fact, anyone familiar with the literature might recognize several patterns rolled into one here. In the context of yesterday’s post, it is a “fast-follower” strategy because it requires a volume spike, created by the “first movers.”
17 Points from William J. O’Neil
William O’Neil is likely one of the greatest traders of our time based on many things. O’Neil made a huge amount of money while he was only in his twenties, enough to buy a seat on the New York Stock Exchange. He runs an amazingly successful investment advisory company to big money firms. He is also the creator of the CAN SLIM investment strategy which the American Association of Individual Investors named the top performing investment strategy from 1998 to 2009. This non-profit organization tracked more than 50 different investing methods, over a 12 year time period. CANSLIM showed a total gain of 2,763% over the 12 years. The CAN SLIM method is explained in O’Neil’s book “How to Make Money in Stocks”
Those closest to O’Neil that have seen his private trading returns say that they are greater tna Warren Buffett of George Soros over the same period of time. Here are some of the best things that he is quoted as having said.
RISK MANAGEMENT
- I make it a rule to never lose more than 7 percent on any stock I buy. If a stock drops 7 percent below my purchase price, I will automatically sell it at the market – no second-guessing, no hesitation.
- Some people say, “I can’t sell that stock because I’d be taking a loss.” If the stock is below the price you paid for it, selling doesn’t give you a loss; you already have it.
- Letting losses run is the most serious mistake made by most investors.
- The whole secret to winning in the stock market is to lose the least amount possible when you’re not right.
METHOD
- 90% of the people in the stock market, professionals and amateurs alike, simply haven’t done enough homework.
- The first step in learning to pick big stock market winners is for you to examine leading big winners of the past to learn all the characteristics of the most successful stocks. You will learn from this observation what type of price patterns these stocks developed just before their spectacular price advances. (more…)
The Darvas System in a Nutshell
I truly admire author and trader Darrin Donnelly for bringing the system thatNicolas Darvas used to make over $2 million in the stock market into modern times by really setting more precise metrics for the Darvas system. He uses moving averages we have today to look at possible price supports in addition to the price boxes that Darvas used. Below is a concise summary of the Darvas system in an up trending market.
While O’Neil is a brilliant trader who has helped thousands make better investment decisions, I feel that there are some aspects of the CAN SLIM system that, frankly, aren’t all that important in picking winning stocks.
Therefore, we offer a new, easy-to-remember acronym for the Darvas System:
D – Direction of the Market
A – Accelerated Earnings and Sales
R – Relative Price Strength (and Return on Equity)
V – Volume Increasing
A – Aggressive Growth Group
S – Sound Base Pattern
To further explain:
D – Direction of the Market
Is the market, as a whole, in an uptrend? It is highly unlikely that a stock will have huge gains when the overall market is in a downtrend, so make sure the direction of the market is moving upward.
A – Accelerated Earnings and Sales
Is the company seeing increases in earnings and sales this quarter compared to the same quarter last year?
Normally, you want to see stocks with at least 40% increases in earning AND sales in the most recent quarter compared to the same quarter last year. And remember, the higher the increase in earnings and sales, the better. If you have a choice between a stock with a 50% increase and one with a 90% increase, definitely go with the 90% increase stock.
R – Relative Price Strength (and Return on Equity)
Is the stock outperforming most other stocks in terms of its price increase?
Darvas wanted to see stocks that had at least doubled over the past year before he’d consider buying. If a stock has already increased a great deal over the past year, most investors are fearful of a steep decline, but many studies have shown that Darvas was right in his assessment; if a stock had already made a powerful move, it proved that it had the ability to move in such a fashion and therefore, was likely to do it again.
Another important characteristic of ideal Darvas stocks is a high Return on Equity. Fund managers love to see a high ROE. Some put a higher value on ROE than they do earnings and sales. (more…)
A Bird’s Eye View of Yourself
When did position management enter my consciousness? I think it stems from experiences that gave me an appreciation for the psychology behind our behavior. Sure, I had read the classic from Edwin Lefevre, and believed in William O’Neil stop-loss rules. The image that still sticks with me comes from a tiny book I read in 1994 that doesn’t get the pub it deserves.
In his tiny 1930 classic, Fred Kelly gives the example of the farmer who had 12 chickens in a cage, and one slipped out. So he propped open the door and set food out in an attempt to lure the chicken back. Of course, 2 more chickens now escaped. Surely, he can’t accept having only 9 chickens when he just had 11. His repeated efforts to get back to “breakeven” left him panicking to salvage 2 at the end…sound familiar with anyone’s early trading efforts?
The lessons stayed personal until managing an order desk stamped those lessons as universal. Seeing these episodes play out over and over among traders led to a true appreciation of the human wiring that wreaks havoc with our trading. These observations led me in the late 90′s to step outside of myself on every trade and ask if I was that person. Am I holding a short against a wave of strength that will sweep me away tomorrow anyway? If so, why not cover now instead of panicking with my fellow (wrong) shorts later? It was in those moments that I realized the power of anticipating group emotions. I already had a respect for taking losses, but I gradually moved from exiting in panic, to exiting in fear, to exiting when the slightest bit of hope creeped in.
Remember this…if you’re hoping a position bounces back to being a winner, you’re not alone at that moment. Hope is said to be a good companion, but a poor guide. Turn that on its head by realizing that you have a chance to act in defense of your equity by taking your loss before the other “hopers” are forced by emotions to act. Sure, you’re putting yourself in a position of huge regret if the position then recovers, but you’re also preventing the possibility of acting in a panicked state later. Stops can be great teachers…if you find yourself repeatedly getting stopped out just before your idea gets recognized, then you need wider stops. Been there…I now operate with smaller positions and wider stops, giving myself room to be right but not putting my equity at undue risk.
If the image of the farmer doesn’t do it for you, consider 2 traders, Roger and Andy. Both are caught in a bad situation, hoping for the best. Andy decides to come clean and admit his mistake. Roger decides to dig in and show he’s right. Bad idea. A small lie today will be a bigger lie tomorrow…rip the band aid now. Any idea who played that trade right?
It’s OK to be wrong, not OK to stay wrong…that’s the difference between champ and chump. The longer we stay in a trading range, the more explosive the resulting trend will be, and there will be no place for hope. Be ready to trade today’s ego hit for a chance to play again tomorrow, and you give yourself a chance to replace any negative episode with your best one yet.
Short Selling
Recommended books on short-selling:
1) How to Make Money Selling Stocks Short by William O’Neil (Wiley, 2005) – [Technical, Swing & Position Trading]
2) Sell & Sell Short by Dr. Alexander Elder (Wiley, 2008) – [Technical, Day Trading]
3) The Art of Short Selling by Kathryn Staley (Wiley, 1997) – [Fundamental]
4) Sold Short by Manuel Asensio (Wiley, 2001) – [Fundamental]
5) Sell Short: A Simpler, Safer Way to Profit When Stocks Go Down by Michael Shulman (Wiley 2009) – [Macro]
The best way to become an effective short seller is by making it a habit of studying hundreds and even thousands of charts every week. Train your eye to see the setups, the accompanying volume, how the MA’s line up, etc. The only way to do this is with practice. Short-selling can become very profitable due to the simple fact that stocks drop faster than they rise (in most cases) and for me, it typically only takes about 1-3 days to make a decent profit of 10% or more.
Trade only the best setups to increase your odds. I do recommend the use of stop losses above key resistance areas due to the fact that losing short positions can cause serious damage if left unattended.
Cut your losses short, no questions asked
The majority of unskilled investors stubbornly hold onto their losses when the losses are small and reasonable. They could get out cheaply, but being emotionally involved and human, they keep waiting and hoping until their loss gets much bigger and costs them dearly.”
William O’Neil
The key to trading success is emotional discipline. If intelligence were the key, there would be a lot more people making money trading… I know this will sound like a cliche, but the single most important reason that people lose money in the financial markets is that they don’t cut their losses short.”
Victor Sperandeo
Some people say, “I can’t sell that stock because I’d be taking a loss.” If the stock is below the price you paid for it, selling doesn’t give you a loss; you already have it.
William O’Neil
When I became a winner I went from ‘I figured it out, therefore it can’t be wrong’ to ‘I figured it out, but if I’m wrong, I’m getting the hell out, because I want to save my money and go on to the next trade.’”
Marty Schwartz
10 Things that each Trader Must Master
THE THREE M’s: Mind (psychology), Method (a trading edge) and Money (risk or money management).
But what does each of those things mean? Many of these answers came from other great traders sharing their wisdom in books and my own successful trading through all types of markets with bigger and bigger accounts that created a need for me to up my game and get better and better.
Mind (psychology) You must have the right winning mind set to make it in trading.
Discipline to follow your trading plan.
Perseverance to keep going through the losing periods.
Faith that your trading method works. (more…)
Trading Wise Words
Turtle Trading Principle
Trade with an edge, manage risk, be consistent, and keep it simple.
The entire Turtle training, and indeed the basis of all successful trading, can be summed up in these four core principles.
Curtis Faith, Way Of Turtle
Why Chart Patterns Repeat Themselves
All through time, people have basically acted and re-acted the same way in the market as a result of: greed, fear, ignorance, and hope.
That is why the numerical formations and patterns recur on a constant basis.
Jesse Livermore, How To Trade In Stocks
Stick To Your Trading Rules
Successful trading is about finding the rules that work and then sticking to those rules.
William J. O’neil
Perfect Speculator
Perfect speculator must know when to get in; (more…)