I found "Trade Like a Stock Market Wizard: How to Achieve Super Performance in Stocks in Any Market" by Mark Minervini on the Ama...

Three Trading Lessons From Trade Like a Stock Market Wizard by Mark Minervini

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I found "Trade Like a Stock Market Wizard: How to Achieve Super Performance in Stocks in Any Market" by Mark Minervini on the Amazon's best seller list in the business book category. Readers of the Stock Market Wizards will be familiar with Mark Minervini but that was the first time I heard of his name.


I researched on the author and was impressed by his achievements. From 1994 to 2000, he returned an average of 220 percent per year. He was also the winner of the U.S. Investing Championship title in 1997. With the high rate of return, he grew his initial capital of just a few thousand dollars to become a multimillionaire by the age of 34. I was interested to find out his methods and bought his book without hesitation.

Mark Minervini generously shared his Specific Entry Point Analysis (SEPA) strategy in this book. Topics covered included fundamental analysis, technical analysis and risk management. Even with the width of topics, Mark Minervini was able to cover the topics in depth and make it easy for readers to follow. His trading strategy is adapted from the works of other successful traders such as William O'Neil, Stan Weinstein and Richard Love. If readers would like to go more in depth for particular topics, you could go through their books to deepen your understanding of Mark Minervini's strategy.

He runs his own training programme named "Minervini Private Access" and the subscription is not cheap. It is very generous of him to share his strategy openly in a book that cost a mere fraction of the monthly subscription. Even without Mark Minervini's proprietary system offered to members, there is enough information in this book for readers to improve their trading by leaps and bounds.

The book is a gem and after much filtering, these are the 3 most important trading lessons I picked up from the book.

Three Trading Lessons From "Trade Like a Stock Market Wizard"


1) Trade with the trend is more important than buying at the cheapest price

Mark Minervini observed that most superperformance stocks make big gains while in stage 2 of price cycle (refer to Stan Weinstein's Stage Analysis). He saw no point in trying to pick a bottom and prefer to focus on stocks that are already moving in the direction of your trade. He felt that it was difficult to pick a bottom and at that point the stock lacks upward momentum and may sit at the low price without much progress.

Mark Minervini has created a Trend Template consisting of 8 criteria that a stock must meet to be in a stage 2 uptrend.


Trading with the trend may not be intuitive for many traders since 'buying low selling high' is deeply embedded in most new traders. Visually, if shown a chart, it is intuitive to think that buying at the bottom and selling at the top is the most obvious way to make big profits. However, in real time, it takes many tries to successfully capture a near-bottom. What Mark Minervini advocated may not that impressive by capturing only part of an upmove, but it may be the more efficient way to make money.

Unless you are one of the 'trading gurus' trying to impress, there is no need to try to catch the bottom. It boosts confidence in successfully doing so, but between boosting your ego and making money, the latter is my choice.

2) Institutional Buying Leaves Obvious Trails

Once we have established that the longer-term trend is up, charts can provide clues on the best time to purchase a stock. Mark Minervini suggest to limit selections to stock displaying evidence of being supported by institutional buying. Aside from the volatility contraction pattern (VCP) that Mark Minervini explained in detail in his book, there are other clues that institutions are accumulating the stock. They are big demand (gap) days, low-volume pullbacks and several price shakeouts within the base.

For some retail traders, institutions are like evil corporations who competes with retail traders using unfair advantages. We have even heard stories of institutions using pump and dump tactics to trap retail investors, or running the stops of retail traders to stop them out of trade. Mark Minervini sees institutions as allies and by following the trails of institutions, we can indirectly become their partners in riding with the trend.

3) Tighten Loss In Difficult Market Conditions

Mark Minervini had two outstanding chapters on risk management in this book. One area that strike me most in these two chapters is managing risk in difficult market conditions. Mathematically, Mark Minervini shows that once the batting average drops below 50 percent, increasing your risk proportionately to compensate for a higher expected gain based on higher volatility will eventually cause you to hit negative expectancy; the more your batting average drops, the sooner negative expectancy will be achieved.



During difficult market conditions, Mark Minervini suggested to tighten up losses, settle for smaller profits and get off margin. He also recommend to cut position size and overall capital commitment until batting average and risk/reward profile improve.

As a statistician, the mathematically proof interests me greatly. This may is a simplistic model assuming that risk/reward will not have an effect on batting average. In actual trading conditions, the conclusion should still hold especially for the smaller percentages.

When batting average falls in a difficult market condition, it will be tempting to increase the risk to be stopped out less often. By doing this, the gain/loss ratio may fall as it is difficult to get a proportionately larger return. Even if it is possible to maintain the gain/loss ratio, it is not worthwhile to do so mathematically. We may be approaching a difficult market condition very soon. We will need to remember, by keeping our risk low, we can still make a positive return with a lower batting average. We may get stopped out more often, but the small gains will also add up to make us profitable.

Notable Quotes from the Book

On Commitment:
"The difference between interest and commitment is the will not to give up. When you truly commit to something, you have no alternative but success."

On being right vs making money:
"It wasn't until I suffered big enough losses that I made the decision that turned my performance from mediocre to stellar: I decided it was time to make money and stop stressing about my ego."
"My trading results went from mediocre to outstanding once I finally made the decision to draw a line in the sand and vowed never again to let a loss get out of control. I suggest that you make that same commitment now."

On the late stage of a bull market:
"Typically, a second wave of postleaders

hip stocks start to perform relatively well as money rotates out of the true leaders and into some of the group constitutions, laggard follow-up stocks, or defensive groups such as drugs, tobacco, utilities and food stocks that are thought to be less sensitive to an economic downturn. Follow-on stocks and laggards, however, rarely experience the length, or more important, the magnitude of the price move that true market leaders accomplish."

On preparation before the open of the market:
"Before the open of each trading day, mentally rehearse how you will handle each position based on whatever could potentially unfold during that day. Then, when the market opens for trading, there will be no surprises; you already know how you will respond."

On volatility contraction pattern:
"A common characteristic of virtually all constructive price structures (those under accumulation) is a contraction of volatility accompanied by specific areas in the base structure where volume contracts significantly."


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1 comment:

  1. Interesting article. Thanks for sharing your experience

    ReplyDelete

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