33,554% Return over 5 years | Trade Like a Stock Market Wizard | Interview with Mark Minervini

33,554% Return over 5 years | Trade Like a Stock Market Wizard | Interview with Mark Minervini

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- Hi everyone, welcome back to the Market Chat. My name is Richard Moglen. Joining me today is a very special guest, Mark Minervini. Mark is a veteran trader with over 35 years of experience on Wall Street and over his career, he has yielded incredible performance including a five and a half year period where he averaged a 220% annual return with only one losing quarter. He's also the author of many of my favorite trading books including "Trade Like A Stock Market Wizard", "Think and Trade Like A Champion" and "Mindset Secrets for Winning" as well as being featured in Market Wizards by Jack Schwager.

Finally, he's the US Investment Champion of 1997 and currently leads the 2021 Money Manager Division with a gain of 111% in just three months. Mark thanks so much for being here. Welcome to the show. - Hey, thanks. It's, we finally got together.

- Yeah, it's great to have you on and to start things off, I think I'd like to focus on mindset and kind of the steps you've taken to become the trader you are today. So you said in previous videos that took you about six years before you're profitable, what were some kind of aha moments that really changed things for you and your trading? - Well, I mean, I had a lot of aha moments. Every time I blew myself up and had big problems in the market, which were many, in the beginning because I had no idea what I was doing. I had no mentorship. I had very little money. It was a very challenging environment for me.

So one aha moment was reading "How to Trade in Stocks" by Jesse Livermore. That's one of my favorite books that sort of crystallized everything for me. I really, that little book was a big was a big turning point for me when I had some years of experience and then read that book and was able to realize that what I was doing in real time, in a modern day timeframe was exactly what Jesse Livermore was doing back in the twenties and thirties. And it really gave me a belief that what I was doing was timeless and to take personal responsibility.

And that I knew if I just put in the time and got the expertise and the skill that eventually it would pay off. - Absolutely and that transitions well, I was gonna ask you what are some books historical traders that you've studied or other resources that really have forged the trader yard today and helped you develop your own style? - Well, you probably, people have heard me say this many times but I have over 4,000 books in my library and I've read pretty much every one of them but I would say that there's a handful that I've read 40, 50 times each. So what I did early on was I found some books that I really thought were important and read them over and over and over and over until I really internalized the information. That's what I would suggest so many do with my books read them because my books are really a distilled version of a lot of previous, a lot of previous works. And I'm sure there'll be even more distilled down the road with other people who write books.

So I would rather, you know recommend that somebody reads 10 great books, 50 times each than 500 books, because, you know, first of all there's not many, there's not that many great books. And on top of it if you're reading 500 books you're reading probably, four or 500 different styles, and you really wanna hone in on a particular style and perfect it, pick that style and then really, really perfect the techniques by internalizing whatever that style needs. - Absolutely and anyone who has read your books realizes that establishing discipline and following rules very strictly is a central theme of yours. How important are these things to achieving super performance? - Well, it's the most important, you know without rules and without emotional discipline, it doesn't matter if you have the best strategy in the whole world, if you don't follow it. And most people don't follow a strategy even if, even many thousands of people that have learned from me over the years coming to my seminars and hundreds of thousands, if not more that have read my books, of course, but how many of those people actually follow and are disciplined? A small percentage, but it's anyway it's no different than how, what percentage are great athletes, or great doctors or great trial attorneys.

You know, it's the same in any profession. So the discipline is the most important. As a matter of fact, I was speaking with a good friend of mine from Canada the other day and he said to me, he said, I have to say, he said I think you're the most disciplined person I know in my whole life. I don't think I've ever met anybody that's more disciplined. I would say Mark Richie, our own Mark Ritchie is he's one that's right up there with me. I'd have to say if there's anybody that I've seen, that's as disciplined as I am he'd be probably the next one that I know.

- Very cool. And perfect. Let's pivot now to your trading strategy and routines, well actually before I wanna get to that, you talk a lot about priorities and mindsets circuits for winning, how should new traders who want to achieve super performance structure their goals and also their priorities? - Well look, when you feel when you look at your life, I've been around for 56 years now, and I look back and I might not have realized this when I was 20, but at 56 I realized that all the things that I have and the things that I have accomplished are the things that I put at the top of my list for priorities. And my priorities are different now than they were 20, 25, 30 years ago my priorities are more family oriented now, my wife and my daughter and my health, you know but if you were to ask me what my priorities were, you know when I was 25 or 30, it would have been money and success and stock trading was absolutely the top of being the best trader that I can be.

And so you're gonna, what your life is going to end up going, right, as Ed Seykota said, everybody gets what they want on the market. Well, that's what I'm talking about with priorities. What you prioritize is exactly what you're gonna get your life's results really will come right in the order of your priority.

So if you wanna be a great trader it's gotta be at the top of your list. You know, you don't get a gold medal at the Olympics by being a part time Olympic athlete without having it be your utmost biggest goal and thing that you're striving for every day and pretty much gets put above everything for that particular time period, while you're training for the gold medal. So the same thing with business and anything. - Makes sense, and getting into your training strategy a big part of that is the volatility, contraction pattern.

You're known for the VCP, but a lot of people I think just see it as a chart pattern. Could you explain what's actually going on behind the scenes when it comes to supply and demand, that creates that pattern? It's not just something to memorize, it's something to interpret on the chart. - It's something to understand. And I never dreamed that this VCP was gonna take off like it has, it really has become a vernacular in itself.

And I'm really happy for that because when I, the reason why I developed it was when I started teaching others and I was having a hard time explaining what they needed to look for. And I was finding that a lot of people were looking at the O'Neil work, looking for a couple of handle patterns. And then of course I developed these cheat areas that are a couple of handles with a low handle. And to explain them, I drew this VCP and showed how the tightening in price action would develop. So the VCP is really a characteristic pattern. I use it in virtually every trade that I make.

I, it had, they have VCP characteristics. So it's the, it's not the cause, it's the effect. That's what people have to understand even any chart pattern. People think because, you know everybody's looking at the cup with handle everybody's looking at whatever a wedge or whatever some of these names are. I use my own vernacular now, I don't even know that the terms of some of the standard patterns.

Somebody asked me about a triangle the other day. I don't even know what a triangle is. I guess it represents a triangle. So you have to realize that it's not because the chart is forming that it works. It that's the supply and demand that's forming it that's gonna be there under any circumstances in an auction marketplace.

So that tightening in price from left to right and when you get on the very right side of the chart and it gets very tight, the volume comes down. What it's telling you is that supply has stopped coming to market. And by looking at the chart and seeing where the overhead supply is to the left, by the depth of the base and the length of the base, and how tight it is on the right side and the volume which it's not as easy as just as I'm pointing it out right now. There's a lot of nuances if you get it right you get a pretty good idea of when there's no supply in the stock. And that makes the stock vulnerable to move very sharply because supply and demand, if there's no supply and you have demand, and you've done your homework, and there's institutions that have an appetite for that stock.

Well, then from that very point, it can move fast and that's why you see a lot of these stocks will explode coming out of these tight areas. And that's the same if you went back to 1918 you'd see the exact same price action. And we've looked at charts into the 1800s. Absolutely nothing has changed same exact things happening today has happened then. And the same thing will be happening a hundred years from now.

- Perfect and before we get a little bit more into the technicals, I wanna ask you because I think there's a big part of actually becoming a professional trader and taking responsibility. Could you walk us through your daily routine and how you set yourself up for success during the trading day, including getting your mind right as well as organizing your, that the stocks you own the stocks and your focus list, as well as your ready list? - Well, after 37 years of doing this I got it down pretty, pretty much now. So it's not super exciting or super complex.

It's done very quickly. You know, when I get up in the morning, I usually spend five or 10 minutes just laying, staying still and going through, I do breathing exercises. And while I'm breathing, I go through my day, my routine, I check the market. I usually turn the TV on. I see if it's, you know if the market's blowing up or if it's maybe it's gonna be down huge or it's gonna be big.

And if there's a, if it's let's just say it's gonna be down huge. So I immediately start going through, okay, my process for, you know probably gonna have some stocks are gonna be gaped down, how am I gonna handle them? What if I have something that is, you know move style really big on me? I just started going through sort of the day of what potentiality, what can happen and how I'm gonna deal with it and just sort of visualize dealing with that day. Then I get up and I, and I go and now all my work is done the night before. So any stock work when I go to sit down at my desk, all the positions that I'm looking to buy, or maybe stocks that I wanna sell into strength or better profits I've already figured that all out the night before.

So now it's just a matter of executing. I go see if you know, those stocks cooperate properly if they move to the pivot points but I've done all that work. So now I just go check my check my watch list, organize everything, and I'm ready to go. Because like I said all that work has been done before the open. - And what does your weekly routine look like? How do you search for ideas and VCPS, I guess and also do you take into account the fundamentals as well as the technicals beforehand and what are some non-negotiable criteria? I know you have the trend template that you talk about in your books. Could you talk a little bit about all of that? - Okay, so that's a bunch of things.

So on the weekend I so my biggest work, I run a lot of screens and I do a lot of work on the weekend. So I work both on Saturday and Sunday, usually one day heavier than the other depending. And during the week I'm still searching each day, intraday and it depends if I have a whole bunch of names that came up on the weekend work then I might not search as hard during the week. If it's something that's really sparse and I might've finished really not many ideas. And then I real, I know there's not much to look for so that will ebb and flow.

But as far as you know, non-negotiables you're gonna want the stocks in an uptrend. And the reason why, and you talk about the trend template and Market Smith, they have, it'll say, Minervini there's a section that has my trend templates, three trend templates, the Minervini trend templates. The reason why you want to be in that uptrend is because when you go back and you look at the biggest winning stocks and stocks that made the big moves 98% of them were in stage two uptrends, 98% of them met my criteria and the trend template. So if you're gonna find a big winner, you know you wanna be in the 98% club, not the 2% club, right? You want it 98%.

So if you're operating in a downtrend, well then there's a based on history, you've got a 2% probability of being in a big winner but people wanna buy it before it moves up. And they think they, that that's necessary but it's really not because before the stock makes a big move, it's in an uptrend. - Absolutely, and in terms of fundamentals I guess we'll point people to your book 'cause you talk about that a lot, but could you give some tips for people who are looking for those VCPS and they're going through the charts, you obviously have developed your eyes. So you can quickly probably within seconds go through a bunch of stocks and see it.

But what are some tips for people to find VCPs if they're newer to this? - The tips are to, you know you have a lot of examples in my books. So you go to the books and you take a look at those examples, and then look for stocks that look like that, and then build your own, build your own model books, look for stocks find the stocks that have those patterns. And then the ones that worked out, the ones that didn't work out, you make copies of those.

You maybe put them in two separate piles and you start analyzing them and taking a look at what works and what doesn't work. But you start off with some good, you know some good precedents of winners that came from low-risk entry points for, you know maybe a O'Neill's book, I believe could use weekly charts. So that might be for a little bit longer term investors but to get really specific and pinpoint my book has a lot of charts there from the daily perspective. And then of course if you've gone to my workshop you have a workbook and that's where you've got there's four or 500 pages there and hundreds of examples. So you've got those precedents and that's the, that's the starting point. That's where I started.

I started with looking at the best winning names and then seeing, backing into current names that looked like those names. I know you asked about fundamentals before, fundamentals are, I'm always looking for the fundamentals but I'll never invest in a stock just because of fundamentals it has to have the technicals. So it has great earnings great sales, great margins, great story. You know, fundamentals are great, great management, a return on equity, but the stocks in a downtrend, I'm not buying it. So, but on the other hand stocks in an uptrend has no fundamentals, you know or when I say fundamentals reported fundamentals, maybe they're showing losses, right? No sales, losses, but it's a biotech company.

Well, 75, 80% of biotechs don't have earnings. So that's not a situation that you would ignore. Now, you're gonna be trading off the chart.

You're looking for very high relative strength, high alpha names. You're looking for it, you're looking at the the FDA approval process, things like that. So you have to know the category that the company's in and then you know what fundamental driver to look for. And again, in my first book, there's no fundamentals in my second book.

My first book has a pretty big section on fundamentals. - Perfect and in terms of fundamentals a little bit, do you also look for a group moves? So if a stock is setting up with the VCP does it add to your conviction that multiple other stocks within that sector or industry group are also showing signs of accumulation and are in stage two of trends? - Yes and no. So, and I'll tell you why. So first of all, you're in a bear market and you start turning up off the lows, right? And you're looking for group action, right? You're trying to get some confirmation.

Well, sometimes you'll get the very cream of the crop. We'll set up and take off and they'll and that's why they're called leaders they'll lead. And by the time you get to the group and you see that the group's doing well, the best stocks are long gone. And this is what happened to me in the eighties and somewhat in the early nineties, when I first started getting this down I was looking at the market saying, okay, wait till we get the fall through day, look for, you know good action in the market. Then look for the groups and then look for the best stocks in the group.

I was always missing the leaders. I very seldom had leaders. I was buying laggers all the time.

The leaders were extended, either I was buying extended leaders or I was buying laggers. So I said, why am I keep missing these stocks? How come I don't see them? So then I flipped it completely around. And I said, I'm gonna go stocks, group, market and let the stocks lead me to the groups. And when stocks are acting well and we're seeing groups working we know it's a healthy market. And that's when I started grabbing all the leaders and had that big run that you've talked about that five-year run, was based on completely flipping the script.

- And during that correction are you running any specific screens or are you just looking at every stock that passes through your trend template? - Well, the trend template is just a qualifier. That's just a first criteria. So that's not the, all the criteria, but that's what I call a qualifier. Non-negotiable criteria, it to meet that criteria. So I'm looking for stocks.

Now it depends again if let's say we're starting a new, you know we're have a bear market starting a new bull market. Well, then I'm gonna look for the highest relative strength name, stocks near new highs, stocks that have held up the most, stocks that have rebound the fastest those type of names. Now let's say we're in late stage in a market and we've been in a bull market for a couple of years and we have a six week correction. Well, in that case, I might run a six week relative strength and see what held up the best during that six weeks.

That's what I call a utility screen. So you have certain, you know you gotta think of it sort of like, you know you're a builder or a carpenter, right? You've got a screwdriver, a hammer, drill you've got different tools. You gotta know when to apply those. You're still building a house.

You're still a carpenter, but you have different tools and tactics for different parts of the job. - Perfect, I think that's well said and I'm getting actually down to the buy point. Let's talk about the actual pivot point. Could you, could you define that and talk about what you're looking for in the moment right before you're about to buy as a stock is passing through that pivot point. - All right. So pivot points come in a lot of different shapes and forms that could be off of, you know very large patterns, small patterns.

They could be coming off of the low of the base of the right side or for what I call a cheat area or a low cheat. They could be coming off of a handle. It could be a pullback buy there's a lot of different ways, but a pivot is a an actionable point of where it moves through, it moves through a level and that level signifies that that's the area that it's cleared for you to then start buying. The key is, is that you're trading from a perspective that you know what to expect.

That's the whole key, the whole reason why I've dedicated myself to one strategy and one way for 37 years I'm doing the same thing that I started. I just, I do it better now. I've perfected it over the years and my skills gotten better, but because I wanna be a master at something. So I know every, every eventuality, everything to expect because that's really the key is knowing when things are acting normal or abnormal, because there are no absolutes. So I have a certain, certain reference points that I'm looking for.

And from those levels, I know this is not acting right. This is exactly what it's supposed to be doing. So those pivot points have to be taken into consideration but Jesse Livermore used pivot points a little bit differently than I would use a pivot point coming out of a chart back then he was plotting things and plotting price and very interesting you know, you should study Livermore because he's definitely one of the greatest of all time and just really the pioneer of pivot points for sure. So, yeah. And then O'Neill, of course his work is phenomenal with moving through buy points and pivot points based on precisely what I'm talking about.

I've taken it and I think who was it? I'm trying remember, oh, from Stock B. (indistinct) Yeah, he said to me one time we were at a seminar and he said, this is surgical. You know, you've taken this to a surgical level and it's true, you know I've taken it to a point where it's really and David Ryan made a similar comment where, this is really sort of like taking the previous works and refining them down to really precise, really precise buying.

And I think you young guys you're getting it where you're getting more, so precise you're studying my work and you're putting it all together and it's just getting more and more. And with the, with the speed and what we're able to have the tools that we have now it's just getting more and more precise and fast. So, and it could, you know these pivots can be used on intraday charts too. It doesn't, it can be used on intraday charts.

Weekly daily, doesn't know any timeframe. These are timeless principles. - Absolutely, it's supply and demand in its purest form.

Speaking of intraday charts when you're actually really pinpointing in on that pivot point, are you looking only at the daily or are you looking intraday and also what are you looking for in terms of volume coming in at that point? - Well, I'm always looking for, I'm always, I'm using a daily to, that's the main chart that I'm screening on. Once I see something I like on the daily, I immediately look at the weekly and I'm always looking for the weekly too. And it would take some time to really talk about, you know what I'm looking on both and, but both are valuable. And then when I'm buying, I'm not looking at the intraday chart, I'm looking at the daily chart, I'm buying off the daily.

The only time I'm looking at the intraday is if I'm buying a pullback, sometimes when I'm buying a pullback and I wanna wait until it turns back up because I'm very seldom ever buying on the way down. Even if it's a pullback, I'm waiting for it to turn up. I might look at a five minute and see if it stabilized. And maybe it made a little intraday pattern, it's starting to turn up from that very rare but 99% of the time I'm relying on the daily chart.

- Makes sense. And in terms of that initial stop-loss point where does that usually line up the low of the day, the low of the week or does it depend on the technical chart pattern? - It depends on a handful of things. You know, the low of the day is very obvious and these are very obvious levels. So you have to be careful about putting them at such obvious levels but there are times where obvious levels are, you should use, when things are really working well you should use obvious levels because they're not gonna take them out very often and they should hold when you're in a whipsaw market and you're going, and it's and things are moving all over the place, you can get the undercut, these very, you know the 50 day, the 20 day, the recent low the day's low, the low in the pivot, the low in the base they become levels that seems like the you know, the price seeks those levels, it hunts them out and knocks everybody out, creates those shakeouts. So it's sorta depends on the environment. The main thing is math behind it.

You know, you don't wanna think about it as much as where's the stop level to the chart. You wanna think about where's the stock level on the chart or whatever the stop level is. What does that, what does that math? Cause if you're, if that stop on the chart is that it's 15% away from your buy point and your average gain is 10% well and you're right usually 50% of the time. Well, that's a losing proposition.

So rule number one you always wanna be getting odds on your money. You always wanna get odds on your money. - Absolutely and how many names do you usually hold at once and how do you determine your initial position sizing? And also, do you enter all at once or will you add to a position if that applies? - Well, there is no set in stone formula, except there are some general guidelines. I'm usually not taking a position, I might take a very light position just to keep my finger on the pulse.

And I'll buy a token amount of shares when things are really not working, or I want just getting in the market. But generally speaking a five or 10% position would be a small, would be a starter position, would be on the smaller side a large position would be 25%, although right now trading with this US investing championship, you know like I've said a few times before you got to trade like an animal because everybody else is trading like an animal. And it's like in sports, you know the other guys are taking steroids, so you have to take steroids.

So I'm going full full margin using leverage with the, you know with my trading right now. So a lot of big positions, a lot of short term trading around positions, but generally speaking, and going back to let's say some of the periods where I made my biggest returns 25% position sizes, anywhere between five or 10% on the low side, trying to shoot for an optimal four to eight stocks fully margined no more than 10 or 12. - Makes sense. And after you have a position set and you've got some profit when do you decide when to take some off the table and how do you balance locking in gains while also letting winners trend? - What was the first part? - When do you take profits, if you've already got a gain? - So again, it depends like right now, this recent little run we've had pretty much all year but definitely for a couple, maybe six eight weeks of this first three months of the year or so breakouts just stopped following through. You know? You've probably, you've seen that where- - I've had happened.

- So many bases set up, there's all these big, you know these bases setting up and everything's breaking out but you'd get one to three days. So I made an adjustment real quick. I said, I'm gonna take one or three days, and I'm gonna just, I'm gonna pound this with, you know with big positions and short-term trade. It's worked out great.

That's not something that I always do. So, but let's just say everything was working and, you know stocks are coming out and they're and they're ripping higher and they're following through. And you find that you sell that stock in a couple of days and you're sitting there going, boy I wish I didn't sell that stock.

It's now 20% , you've got to change your tactic. You know, you've got to adjust to that. You don't have to, but look, here's the thing, it doesn't matter what happens to the stock after you sell it. If you were to, if you were to take 5% risk and sell every single stock at a 10% gain and you're able to do that 50% of the time for each and do it, I don't know, a couple hundred times a year. You're a very rich man in the short period of time. Okay, does it matter if the stock and levels from there where you sold it for 10% if you can roll into another one and do it again and again, and again and again.

So think of it as flipping a coin. If I told you, I'm gonna give you $2 for heads you lose a dollar on tails and you can flip that coin. You wanna flip it as many times as possible, right? - Right.

- So if you could flip it and your goal was to say, hey I wanna get to X number of, I wanna make X amount of money by this amount of time. Well, you would have to just say, okay, in that amount of time, I've got to flip this coin this many times because I'm gonna make a net dollar every two times I flip it, right? So that's sort of the thinking is there an optimal place to sell? Yeah, if you have a crystal ball and in hindsight, but no there's really not. I sell stocks all the time at 10% gains and they go up 50 a hundred percent.

I bought Cisco off of the new issue. I took five points and it went up 70000% after that. I traded Home Depot for 30% move in the 90s. It went up 40000% so, but I made 36000% in that same time period trading. So it really depends on how you wanna skin the cat, you know? So I sell, when I think the risk outweighs the reward.

And here's a key, I'll give you a sort of a key tip. When do you sell them the strength versus selling to weakness? When do you have backstop versus sell right into the strength? Well, if your profits are 10% and your losses let's say are five, you can't wait until a stock stops you out on the downside because if it goes up 10, 12% by the time you get a reversal or whatever you're looking forward to stop you out you've given back most of the game. You're probably only up five or 6%.

So there's no profit. Now, if you're up 50%, you're up a hundred percent and you took a 5% risk, okay. You maybe use the 50 day a weekly close below the 50. You can backstop it, trail and really give it some room because you've got a big move now.

So see, it depends. Now, if I'm on a shorter term move, you know I'm just getting out when the getting's good. I'm not waiting for that stock to break and coming in on me 'cause then I'm gonna give back while my profit.

- Absolutely, and I think that's a great, great point. Getting into risk management which we were just talking about a little bit I think is really the most important thing. You posted a great tweet last year showing after the September correction how you progressively increased positions you had Snap early on you you added more the next day, the more the next day. And as the market turned, you kept adding more stocks. Could you talk a little bit about progressive exposure and how do you put it into practice? For instance, coming out of this most recent correction.

- There's so many ways I use progressive exposure intraday, I use it daily. So, and just this last week, I went over that with the way that I traded throughout the day just how I traded throughout the day and use progressive exposure. So I'm always thinking progressively exposing and decreasing my positions based on the traction that I'm getting. So a very simple way to explain it is so you buy a one or two stocks, right? And maybe they're five or 10% positions okay? Those stocks start working out maybe they're up seven, eight percentage, okay, you can buy another one or two. You got a little bit of profit. Maybe you sell one of them and you nail down a 10% profit.

Well if you have one stock goes up 10%, you sell it. And your stops are 5%, you just finance two more trades. You could buy, you can now buy two stocks and use a 5% stop on each. And if you get stopped out, you're gonna break even because you're financing using that gain to finance and now you're levering up.

So, and now let's just say, you get a few more winners. So now you've even bank more money and you can get a little more aggressive. This is the exact opposite of what people do. You know, usually they'll sell and then they get nervous that, you know things are gonna turn around on them. And then when they go down, when the stocks go down and they're at losses, they start doubling up and they start progressively exposing by averaging.

And that's how they get themselves into a lot of trouble. So, and just the opposite when things are let's say those few stocks go against you. So now you would cut your position sizing down and then keep progressively bringing it down until you're trading negligibly or you'd be in cash. If you're, if you haven't seen a profit in your last four or five trades at 20, 25% exposure you shouldn't be going at 50% exposure. You shouldn't be going to 75 or a hundred.

You should be going to 10 to five to zero, you know and bending with the market. So I think progressive exposure is probably one of the, the most important tactics that you can utilize to protect yourself and to keep yourself from having big drawdowns and also to keep yourself where you're, where you're invested in bull markets, because you're exposing up, see the key is, is that you wanna have a system that guarantees that you're trading your largest when you're trading your best and you're trading the smallest when you're trading your worst. So by progressively and increasing your size when things are going well you're gonna be heavily invested in a good bull market. And by bringing it down you're gonna be lightly invested when you go into a bear market. - Makes sense. And are there any things you look at in terms of the market whether it's an extension for moving average, the breadth of the market that when we're getting a little bit long in the tooth than in a rally we're already up 30% in a few weeks that might tell you to scale back a little bit, to prevent maybe a big draw down when the market really reverses hard? - Well, you're talking about like market indicators or stock, things in individuals stocks? - Market indicators.

So maybe the market getting 15% above the moving average something like that. - No, no, because that can go on for a long, long time. You know, I look at sentiment, you know when everybody's bullish, then my antennas go up and I start looking for very specific sell signals in the individual stocks.

But the main thing, momentum trumps sentiment, you can I mean, you can have a lot of bullish sentiment and keep going for an extended period of time. So ultimately it comes down to the individual stocks. I'm really letting the stocks dictate and it's gonna show up in the stocks. If the market is in trouble the stocks are gonna roll over.

They're gonna stop me out. They're gonna, if this if the market's really running up too fast you're gonna have all the stocks are gonna be extended and I'm gonna be selling it at strength. And it's gonna all show up in the stocks. And sometimes it shows up in the stocks well before the market gets into trouble or even you'll see a bunch of stock set up before the market bottoms in a bear market, and it'll give you a lead time. I found the best indicator for me are the individual stocks. But I guess you have to know what you're looking at and know how to read it.

- Right, all right so Mark why don't we take a look at some charts and see how you analyze price and volume action. And we'll look at some that worked and some that ultimately stopped you out at a loss. - Yeah. Okay, so NMM bought it right here, coming out and then see it comes in a few days and then got knocked out. And this is one that if this may be tightened up right here.

This might've been what I call a failure. It was a failure reset was just, wasn't crisp enough for me and it kind of wedged up. It got away from me.

I was looking to make goodbye a back, but I did not. And bang comes out now, it's just putting another base. And it's coming out of this it came out on Thursday at a reversal. Now you got a little reversal recovery on Friday. So still moving along here. I don't know what's this up here.

So since I, yeah, so this is up almost 70% from that first buy point. So unfortunately, yeah. So again, this is how they normally look it's usually within a few days to a few weeks that I'm knocked out at a loss, it's pretty quick. And you know, that's an important thing to talk about or important thing to understand is that you wanna be knocked out fast.

Now I know that people get frustrated, they buy the stock and boom, it turns around and they're out right away. That's exactly what you want. You wanna know right away if you're wrong so now you can move to something else and you're not wasting time. If I sat in the stock for six months and it didn't go anywhere and then stopped me out, well I just wasted six months of, of time to invest.

So that's one of the reasons why you wanna time your trades as best as possible. And know if you're right, immediately know I'm right or I'm wrong and engage along the way, you know if things are acting normal or not. So you can, if it's not acting right and it's not making any money, you move on, you know the only good stock is a stock that's going up. - Absolutely, and here, I'm talking about the failure reset and maybe you're looking at other names but do you know specifically why you didn't reenter this? It had some nice support moves off the lows there on those two bars. - Yeah, I mean, you know when we get volatile like this and you know I call it the megaphone effect when you can do this here, instead of being tight you start widening, you know that is the exact opposite of what I'm looking for. So that volatility I have I'm very careful to start getting back, getting into a stock when it's volatile that's where you really get whipped around.

So that's, you know the main reason, if like I said, maybe if this set up really crisp around the old high here I can't really tell you what I was thinking at the time if I'm getting hit on a number of names, I'm not gonna probably start playing failure resets. You know, if this is maybe this is the third or fourth stop that got hit in a row, I'm gonna be more timid. If everything else is working and I'm seeing a lot of stocks that shake out and reset I might be, you know getting back into this, it really depends on how I'm gauging the environment at the particular time.

- Very interesting. And you've said something a couple of times along the lines of you're paying attention to what's working and kind of shifting your focus to that type of setup. So it's interesting that if breakouts are working you're looking at those, pull backs are working you're looking at those, it's kind of obvious but it's something that definitely people should be doing. - Well and here's the danger of saying that I got to be very careful and be very, people take things very literally in these interviews that does not mean you're changing your strategy. It doesn't mean that I'm not buying from BCPS.

It doesn't mean that all of a sudden I'm buying stocks that are down. It means it means that I'm changing my tactic within the realm of my strategy. So like again, I'm selling a lot of stocks now that just when they right, when they run up, oh but I'm still buying from the exact same buy points.

I just know that they're not following through as much. So I haven't changed my research or I haven't changed the way I do things. I just changed my expectation from the upside until I start seeing better upside because I can't be using stops for swing trades if you're only getting short-term moves out of them and I keep getting stopped out, it's not paying for it. You always have to think, am I gonna pay for this risk? You've got to pay for the risk, right? You've got to flip that coin. You got to get $2 on heads, if you're gonna risk a dollar on tails, or, I mean if you've got a dollar 10, it'll still work but you'd have to flip that coin a whole lot more times. So if you're a day trader, you can have a smaller ratio.

So again, it all comes down to math. - Absolutely and thanks for clarifying that. Looking at this chart, how long does that contraction have to be that last contraction? Because it looks like this is about two, two and a half weeks before it moves up through that prior high. - Well, that was one of the problems is that this really wasn't a very long base. - It's kind of stubby yeah. - Well, this was more of a power play type situation.

If I go back here from the top and you go back a couple months, eight weeks and you measure from here to here, you're at 124%. So that is a power play of what I call a power play. Only I would refer to these as high, tight flags. You don't have, this isn't a real powerful though explosive power play.

It's sorta just kind of worked its way higher. And then you put in the short base. So these short bases I'll play on the power moves but you didn't have that type of real explosion.

So sometimes those get what I call wiggles. You know, you get some wiggles around the breakouts and it didn't really, really tighten up super tight. So it wasn't, it wasn't perfect but it was good enough to play.

- Gotcha and would you mind bringing up Snap and maybe we can talk about a low cheat set up or I'm not quite sure what set up you bought this off of last year. - Let's see if they're still there. - Yeah, I loved how tight it was within that base for I think it was a three weeks tight within the base which caught my eye after you post about it on Twitter.

- Yeah, this I have drawn on here was for my clients and not for this particular presentation, but it's still here. So, bought it here on 915 as it started moving right through. And you see, it comes, it moves out, follows through the next day and then comes in one, two, three days but as a good close on the third day see that didn't come down enough to stop me out. It didn't come back to my stop.

So it was still in it. And then I believe this is where I sold into earnings. So then it had the earnings report and I had a nice little cushion. It worked its way up. Let's get the percentage tool out.

So that looks like about, so going into earnings, like maybe a 16, 17% cushion. So now you can go into earnings and sell into earnings. So that stock went up, you know into earnings about 50%.

So that's a very classic. Now this was, if you look at the market this was actually setting up during a correction. So this was one of the very first, I'm not sure if it was the first, but I think it was the first, second or third stock that I bought after going cash. So coming back into the market this was one of the very first stocks. And again, I don't know if, let me see if bring up the NASDAQ, if we can't, what date was that? That was like September. - September 15th or around there somewhere.

Yeah, somewhere, I think it was so, yeah, right there I think it was around there. - Yeah so look the market here. So I'm buying it right here.

See the market had just come in on a correction here but see that stock sell that stock broke out. Here's what happened, that stock broke out. All right, let's go, let's look at this and then we'll go back to Snap. So that stock broke out here. Then this little pullback in the market, this next leg down in the market, all that did was just bring Snap in but not enough to pit the stop. Then when the market turned back up Snap broke out of its base.

Let's bring Snap back up, see again and see how the stock was telling the story here not the market. If you waited for the market, you'd be buying over here. You know, you'd be buying late. So see, broke out here. Now as the market came in Snap just came down for a few days.

But as long as the whole just stop, that's fine. Now, if the market comes in and they're holding our stock, then it's acting fine. Then when the market turned back up Snap came out and went back and went to new high ground. So it was leading, leading stocks lead. - Absolutely, definitely a clear example of RS. And what are your thoughts on traders taking responsibility for their trading? I see some people buying stocks 50% off their lows and they get stopped out while it's still in a downtrend.

What are your thoughts about people really focusing on themselves, studying their own trades and kind of improving themselves and taking responsibility for what actually happens with their trading instead of blaming the algos or, or all of that? - Well, I don't know. I mean, I don't know who else could be to blame trading is one person, you're making the trade. You're making the decision. So if, this is about the purest business there is where, that's why I got in it. There's no red tape, there's no prejudice. There is no boss to impress.

And if you're good, you get rewarded. I mean the results tell the level of skill, if you're skillful at this then it'll show up in the PNL. So again, personal responsibility, the algos all this crap that we hear that it's manipulated in this that, you know back when the 87 crash, it was program trading you know, and then the SOES bandits came in. Those were the algos of the day in the nineties it was, they blamed the SOES bandits, you know and then it's high frequency trading. And now it's algos, this is nonsense.

This is nonsense. All right, all those computers have to basically make the same exact maneuvers that a human would make. And I can tell you right now, I'll trade any algo or any computer out there any day. It's absurd to think that a computer is gonna cause all these problems and be able to out maneuver a skillful person, it's not gonna happen.

It's just that yes. Can they cause noise? Sure and at certain times they're great, sometimes though you know, people didn't mind, I guess the, you know these algorithms or whatever, when a GME ran up, right? Then it's okay. Then fine when you're on the profitable side of them. But then the market crashes and we have a flash crash, we've got to blame the computers, it's the computers but the bull market goes up for three years, it grinds its way higher for three years and everybody makes millions and everything's okay until you have that one big down day. - Absolutely, we always have to respect risk. Going back to this chart of Snap did you play a portion of this for a larger move? Maybe sold half 'cause we were just coming out of a correction.

- No, I don't remember exactly how I played this. That's why I'm going by these notes here that we're hearing. But again, no, but I tried to come back in and I think right here, if I remember I think I tried to come back on over cause now it made a power play.

Now it moved up, see it's up over a hundred percent. Has that little tight pivot. And then I got stopped out right here.

Yeah, well actually, yeah, I'm pretty sure I bought it on 11 six and then got knocked out again. And then it, again, it was a reset came back up and then, you know and now it's getting more sloppy as it gets later, you know you'll get more and more sloppy as the stock gets more eyes on it gets more fall. And then of course, you know as it's getting more and more profitable, you're having the bigger players now are gonna be profit taking and they're gonna create, you know that real volatility because they're moving the big size.

- Absolutely. But are you willing to are you more willing to play a stock for a larger move when we're just coming out of a correction and maybe use the 50 day rule, if it's a major bear market like we had in March? - So the time when you should be giving a stock you should be giving a stock the benefit of the doubt and trying to play it for a larger move is coming out of a correction out of a bear market or a correction, spend the larger the correction the more you should be thinking longer term because now you might be onto a key leader that's gonna start that new cycle and make a multi-year run. And if the market goes into a bull market, you could have these leaders can go three, four or 500% and in some cases many thousands of percent. So in that case you'd be using you could use what you have to read about that.

Of course, it's my 50 day or better rule where, you use the 50 day once it catches up to your, to your stop and then your break even point, you switch over to a close blow the 50, and there's a stock just recently I think it's my memory serves me, I was just seeing it today, Boyd. So we took a look at, let's take a look at a weekly on Boyd. So look at Boyd. Boyd comes out of this bear market. You see how look at this ride the 50, the whole way. - Wow, wow.

- Not a single weekly close below the 50 through the entire move, right? So if you just said, hey I'm just gonna wait for a weekly close below the 50 and maybe if its below it by a certain percentage, you don't wanna wait until it's 50% below it, if it crashes but within reason you would stay with this. So this whole move. And if you go back cycle after cycle you'll find that there's a handful of leaders that do this, that will stay above that 50 for the whole move or a good portion of the move.

So yeah, investing in a bull market. Now, when it later on if I was to buy it here now and I seen it's held for all this time now I'm looking for it maybe to get extended from the 50 and to start running up and accelerating its rate of advance and I use that to sell into this now you're getting a blow off a climax top, something like that. And you'd be selling it the strength there. - Absolutely, and looking back on a trade how you determine whether something was a good trade versus a bad trade? - Well, you can have a, first of all you could have a good trade, you can make a perfect trade and get stopped, right? You can make a terrible decision and be, and make money.

That's why you can't, the result can't justify the means. You have to have rules and a strategy. A good trade is a trade that you stuck to your rules and you executed your strategy effectively. So that could mean losing. So that's the, see that's the problem with the market there's periods where, you know you might do things that are really not very prudent and not, and have no strategy all and just get lucky and just be in the right place at the right time. And next thing you know, you think that's the way to do it.

And meanwhile, you're like a turkey being fattened up for the kill. So it's really important that you have rules. And when you go back and you analyze what you did and you're doing post analysis, you're not being biased by the outcome. You don't wanna be outcome biased. You wanna be discipline bias. You wanna be strategy bias.

Did I follow my discipline? Did I follow the rules? Okay, take a look at that. How's that working? And then reassess, but don't say, oh, well the stock went up so I made a good decision, not necessarily. - And how important is it for traders to keep track of their summary statistics the batting average, average gain, average loss, average holding period for losers and an average holding period for winners is something that Dr. Wish really emphasized in the course that I took.

How important is that? - So how important are the numbers? The average gain, average loss, batting average. So for me, I think it's the utmost importance. I mean, I look at it this way, how do you know where to set your stop if you don't know what your, how would you know where to set the loss on tails on that coin that I talked about flipping if you don't know what you're gonna gain on heads and you don't know how many times it's gonna fall on heads, what if it's gonna fall on heads one out of 10 times and you're only gonna make a dollar 10 on heads? So can you still lose a dollar on tails? Or can it, so again, you know you have to know what your outcome or potential outcome is at least to a point where you have a realistic expectation.

You know, to me, it's like flying a plane without an instrument panel. So the important thing is to not only know your numbers in hindsight, to see what you did but then forward to when you make a decision trading that thinking the spreadsheet makes its way into your trading. So now, as you're making a trade, you're cognizant of what you need to achieve mathematically and that starts to work into where you set your stops and you're thinking, you know in terms of risk reward, relationship how would you be able to do that if you didn't know that information? - And that's how you kind of determine whether you're a singles, doubles, triples or a home run hitter, you look at those numbers the average gain, average loss, and then from those numbers you decide where to take your profits on average.

And of course, when to cut your losses. - Yes, and if your average gain is say, 10%, you go back and you take a look at your last a hundred trades 200 trades, and your average gain has been 10%. You know, you're right 48% of the time wrong 52% of the time, average gain is 10%. Well, if you have a stock, that's up 20%, you're double your average gain. If you sell that stock, what does that do to your average gain? - It boosts it.

- It improves it, right? So right there, you're improving, right? If it's at 5% and your average gain's 10, you have to think to yourself, well, that's not even at my average, right? That's probably not a time to be selling it unless something's going wrong. And then you look at your loss let's say your average loss is 5%. Well, if you're taking 5% gains, 10% losses, are you gonna, is that profitable to take 5%? You know, so now, you know that's really not a spot that you should be looking to sell unless something's wrong. If something's wrong yes, that's a different story. But so again, letting the math work its way into your trading, and that's really the key it's not just knowing, okay this is what I did.

Okay, well now what are you gonna do with that information? Now you could, that information is very valuable to, for your mindset as you're actually placing trades. - Absolutely and to bring up a great question that somebody posted on Twitter I asked for questions. I thought this is excellent.

How do you mentally come back from up a gap down a large loss larger than your average loss or even a period where you're not trading well, how do you mentally reset, do what you need to do follow your rules and prepare for the next trade and get back on your feet? - Well, I know this is gonna sound maybe crazy to some people but I almost never get in that situation. To be honest with you, I very seldom get myself into big trouble. And that's because I'm really very prudently using progressive exposure, never really, you know opening my nose up and putting myself at big risk without really being covered.

You know, in poker, they say, always give yourself out. Now it doesn't mean that I don't get torpedoed every now and then, yes, that does happen. It does happen, if it does happen there's not much you can do about it, right? I mean, if the stock gaps down on you and it gets through your stop you got to cut the bleeding, you know you don't know how bad it's gonna get, sometimes the stock gaps down, your stop is 5% it gaps down 15%, you sell it turns around rallies all the way back.

And it turns out if you held it you wouldn't have lost any money or maybe made money. Well, that mean that you should not cut your loss next time. First of all, those are what we call the tails, in a distribution curve those are the tails. Those are outliers, right? They're not gonna happen that often. All right, it's gonna be, it shouldn't be unless you're putting yourself in again you're putting yourself into downtrends and stocks that yeah, then you're gonna have a you're gonna be buying what David Ryan calls serial gappers, you know these are stocks that will you'll get unhappy surprises because you're in a downtrend.

So if you're doing all the proper work these are gonna be very rare. And in the long run they're not gonna really make much of a difference. I know they're not gonna make any difference. If I'm, if I do 200 trades, 500 trades, a thousand trades and I've got two or three outliers, they're not really gonna make a big difference unless I have my entire account fully leveraged into one stock. And I would never, I would never do that holding overnight and putting myself in a position where I had gap risk. - Perfect and last question, when it comes to charts and I think this is something that I personally struggle with, and a lot of people do.

It's kind of knowing when to sell into strength. Is it completely a mathematical thing when it's gonna improve your average gain that's when you do it or is it a feel thing it's market dependent? W hat kind of are the factors in play there? - Well, they're all the factors above that you said, but the situation is is that there's a wholesaling section in my most recent stock book in "Thinking Trading Like a Champion" there's a wholesaling section and we could take quite a bit to go through all that and look at all those sell rules, but there's sell rules for selling at the strength and selling until weakness. But when the stock has an accelerated rate of advance and it becomes unsustainable it doesn't mean that you don't sell the stock and it goes up much more from there. See, you have to realize what trading is about.

It's not getting the high and getting the low, it's about making more than you risk and being able to do it over and over enough times within a given period of time to reach your goal. That's what trading is about. It has nothing to do with hindsight of what happens after you trade. The key is what happens during the trade, what happened before, and what happened after is not relevant to your profitability. All right, it may be relevant to your analysis of when you're gonna get in the stock or maybe improve your decision making later on by looking at your post analysis of what happened but it doesn't make a hell of beans difference to your profitability.

Your profitability is in between the buy point and the sell point. And if the stock has gone up 10000% and then you buy it and it goes up 10 more percent and you sell it, that's all that matters. You've made that amount, right? And if it's not done that and it's gone up 5% and then you make a hundred percent, neither really makes a difference. It matters of what you make in between the buy and the sell.

So again, I don't know, I got away probably from your question, but there's a lot of different sell rules. Like I said before, the general rule of thumb is that if you're on a shorter term trade, you're looking to sort of get, you know get out when they get in is good, right. Sell into strength because you can't really let the stock come back on you because it's gonna give up too much and you're gonna give back all your profit because you're gonna keep your stops very tight on those short term trades. If you're going for a bigger move, well, then you can allow more room and maybe use a backstops and allow yourself to sell stocks into downside sell rules. That's sort of the general rule of thumb, but I would refer to my book on sell rules and O'Neill's book too has a lot of great Sell rules, but some of ours are gonna be the same too, because you know I'm using some of the same Sell rules into some permutations of those sell rules.

- All right Mark, that's awesome. I always like to end it with one more kind of question. What kind of motivating words do you have for new traders who maybe are getting chopped up a bit in 2021? And what can new traders do to shorten the learning curve? - Well, the good news is, is that it's a great time to be a stock trader.

It's a great time to be anything, and the reason why is because the learning curve is automatically shortened because you have, you have things like this right here, right? We have YouTube, we have the internet, we have Zoom and we have all kinds of Twitter and all this exchange of information that when I started, there was nothing. I was going to the library and I was reading books that were old and outdated and from strategies and techniques that never worked in the first place. So it took me years and years and years of trial and error, trial and error to figure it all out.

But now your learning curve has been shortened tremendously but here's the main thing you have to remember, it can be shortened only so much, you can't force experience and there's a certain amount of experience Michael Jordan can tell you how to dribble and toss a basketball, but you're not gonna be able to be a professional basketball player without playing and being in those situations and having a certain amount of experience on the court and in big games. So it's the same thing. You, you know you still have to have a certain amount of experience. So my words would be to make sure that you understand that it's gonna take time and make a commitment to it and do what you love. You know, that's the main thing.

If you enjoy it, then stick with it and you'll get great at it. But there's all the information's there. We have information overload now, there's too much information.

It used to be you couldn't find any information. Now you've got to figure out what is the good information and what's the bullshit. That's the big problem now is narrowing it down to the good information but that's a better problem to have, I think than no information. So it's a great time to be a stock trader. It's a great time to be anything, could learn how to, I'm a musician. I've been a musician my whole life.

When we first, you know when I first started playing and I was learning songs I had to take the album and I had to put the needle back and listen to it and take the, I'll put the needle back and try to play it. Now, the person who played that part and wrote that part is on YouTube, teaching you how to do it. That's why you've got these you got seven year olds playing a song, you know playing the guitar incredibly. And you know, these incredible they look like they're protege gifted, musicians when in fact, no, just the information now and the learning

2021-04-29 23:24

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