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BookReviewofTradeLikeAStockMarketWizardby

MarkMinervini
POSTEDBYWHATHEHECKABOOM MAY4,2014 6COMMENTS

ThefulltitleofthisbookisTradeLikeaStockMarketWizard:HowtoAchieveSuperPerformanceinStocksinAnyMarketbyMark
Minervini(2013).

Firstoff,thisisaterrificbook,especiallyfortraderswhosubscribetotheOWL(ONeil,Wyckoff,Livermore)approachtotrading
stocks.Itookquitesometimetofinishthisbookastherearejustsomanygemsthroughoutthebook.

AbriefhistoryofMarkfromthebook.Hestartedtradingin1983,andhada6yearperiodinwhichhehadanetlossinstocks.He
perseveredandputintonsofhardwork,andmanagedtoachievesuccessfrom1989.Markaveraged220%peryearfrom1994to
2000(33,500%compoundedtotalreturn),andheisfamousforwinningthe1997U.S.InvestingChampionshipwitha155%return
tradinginstockseventhoughotherleveragedassetclasseswereallowedinthesamecompetition.Markwasalsointerviewed
byJackSchwagerinStockMarketWizards.

Markclassifieshimselfasatechnofundamentalist.Hereliesonpriceandvolumeaswellasfundamentalstoincreasetheoddsof
success.ThemethodshedescribedareprettysimilartotheCANSLIMsystemthatWilliamONeilteachesthroughIBD.Thisisnot
surprisingconsideringthatMarkwentthroughthesameprocessasONeil,wherehestudiedtonsofpaststockwinnerstoidentify
whatexactlyledtostockperformance.ThatledtohimformulatinghisownSEPA(SpecificEntryPointAnalysis)systemtopinpoint
thebesttimetoenterastock.

SomethingsthathesharedwhichareontopoftheCANSLIMsysteminclude

MarkincorporatedStanWeinsteinsstageanalysistoidentifywhatstageastockisin,andwouldonlybuyastockifthestockin
astage2uptrend.
Thereismuchmoreemphasisontheimportanceofearningsimprovementandacceleration.Heaskedthequestion:what
causesastocktogointoastage2uptrend?Whathefoundwasthatfundamentals(i.e.earningsgrowthacceleration)was
usuallywhatledastocktobeaccumulatedbyinstitutions,leadingtoastage2uptrend.
MarkidentifiedaVolatilityContractionPattern(VCP),sortofageneralizedversionofthecupwithhandle,tobasicallyusethe
gradualcontractioninastocksvolatilityasanindicatorsignifyingthedryingupofthestockssupply(i.e.distribution).That
thenleadstotheidentificationofapivotbuypoint.Ilikethisversionmuchbetterthanthecupwithhandle,whichforsome
reason,neverresonatedwithme.

Ilikethefactthatthebookcoversmanykeyareasoftradingstocks,includingfundamentals,technicals,riskmanagement,andjust
tradingingeneral.SomeareaswhichIhopedthathecancovermoreindepthwasonstopplacement:exactlywherewouldhe
place his initial stop, and how would he trail the stop, etc. Nonetheless, I did not expect him to give away the farm in a book,
seeingthatheconductsanannualtwodayworkshopwithDavidRyanandalsooffersa$999/month(or$499/monthforannual
package)subscriptiontohisrealtimeanalysis.

Allinall,Ihighlyrecommendpeopletopurchaseacopyofthisbooktoread,andevenreread.

THEGROUNDWORK

DontTreatTradingLikeaHobby

Tradingstocksandrunningabusinessarevirtuallyidentical.Infact,tobesuccessful,youmusttradejustasifyouwere
runningabusiness.Asaninvestor,yourmerchandiseisstocks.Yourobjectiveistobuysharesthatareinstrongdemandand
sellthematahigherprice.
Mostinvestorstreattradingasahobbybecausetheyhaveafulltimejobdoingsomethingelse.However,ifyoutreattrading
likeabusiness,itwillpayyoulikeabusiness.Ifyoutreattradinglikeahobby,itwillpayyoulikeahobby,andhobbiesdont
pay,theycostyou.

SuccessOccursWhenOpportunityMeetsPreparedness

ForyearsIworkedonperfectingmytradingskills,pluggingaway70to80hoursaweek,oftenstayinguptoporeoverstock
chartsandcompanyfinancialsuntilthesuncameupthenextday.Eventhoughtheresultswerentthereyet,Ipersevered.I
spentyearsseparatingtheproverbialwheatfromthechaff,perfectingmyprocessbyanalyzingmysuccessand,more
important,myfailures.Iinvestedcountlesshoursinlearninghowgreatinvestorsapproachedthemarketandhowtheycreated
andexecutedtradingstrategiesanddevelopedtheemotionaldisciplinerequiredtofollowtheirmodels.
Thensomethingwonderfulhappened.Mypreparationintersectedwithopportunity.Ihadbeenhoningmyskillsforyears,and
by1990Iwasfullyequippedtotakeadvantageofanewemergingbullmarket.Iwas100%prepared,likeanOlympicathlete
whohaspracticedandpracticedandisnowreadytoperformwithperfection.
Opportunitiesinthestockmarketcanspringtolifeonshortnotice.Totakeadvantageofthemyoumustbepreparedandready
toact.
Rightnow,somewhereoutintheworldsomeoneistirelesslypreparingforsuccess.Ifyoufailtoprepare,thatsomebody
probablywillmakebigmoneywhileyouonlydreamaboutwhatyoucouldhavebeenandshouldhavedone.

PracticeProperly,ObjectivelyAnalyzeYourResultstoDiscoverMistakes

Whenyourepeatsomethingoverandoveragain,yourbrainstrengthenstheneuralpathwaysthatreinforcetheaction.The
problemisthatthesepathwayswillbereinforcedforincorrectactionsaswellascorrectactions.Anypatternofactionrepeated
continuouslywilleventuallybecomehabit.Therefore,practicedoesnotmakeperfectpracticeonlymakeshabitual.
Inotherwords,thefactthatyouvebeendoingsomethingforawhiledoesntmeanyouareguaranteedsuccess.Itcouldbe
thatyourejustreinforcingbadhabits.

SpecializeinOneTradingStyle

Nobodycankeepswitchingstylessuccessfully
youwillenjoymarketcycleswhenyourtradingstyleoutperformsotherstyles,andyouwillalsolearntoacceptperiods
lessconducivetoyourstyle.
Idoubtyouwillovercometheselessfavorablephasesbyadoptingadifferentstyleeachtimeyourunintodifficulty.Whenit
comestostocktrading,Iknownoonewho,forexample,cansuccessfullytradevalueinonecycleandthenswitchtogrowth
thenextorbealongterminvestoronedayandthenadaytradertosuitthemarketdujour.Tobecomegreatatanything,
youmustbefocusedandmustspecialize.
Youcantsqueezeeverybitofprofit
Ifyouareashorttermtrader,recognizethatsellingastockforaquickprofitonlytowatchitgoontodoubleinpriceisofno
realconcerntoyou.Youoperateinaparticularzoneofastockspricecontinuum,andsomeoneelsemayoperateina
totallydifferentareaofthecurve.However,ifyourealongerterminvestor,therewillbemanytimeswhenyoumakea
decentshorttermgainonlytogiveitallbackinthepursuitofalargermove.
Thekeyistofocusonaparticularstyle,whichmeanssacrificingotherstyles.Onceyoudefineyourstyleandobjectives,it
becomesmucheasiertosticktoaplanandattainsuccess.Intime,youwillberewardedforyoursacrificewithyourown
specialty.
Keepinmindthatifyoufailtodefineyourtrading,youwillalmostcertainlyexperienceinnerconflictatkeydecisionmaking
moments.

KEYSTOSUPERPERFORMANCE

TraitsofSuperperformers

90%ofsuperperformancestocksbegantheirphenomenalpricesurgesasthegeneralmarketcameoutofacorrectionorbear
market.
Superperformancephaseoccursduringthefirst10yearsafterthestocksIPO.
Stockisasmallcapormidcapthathitsaperiodofacceleratedgrowth.
Stockhasarelativelysmalltotalmarketcapandamountofsharesoutstanding.
Majorityhadperiodsofoutperformanceintermsoffundamentalsaswellastechnicalactionbeforetheymadetheirbiggest
gains.
Manytradedatmorethan30or40xearningsbeforetheyexperiencedtheirlargestadvance.

KeytoMakingBigMoneyinStocks

Thekeytomakingbigmoneyinstocksistoalignsupportingfundamentalswithconstructivepriceactionduringahealthy
overallmarketenvironment.
Youwantalltheforcesbehindyou:fundamental,technical,andmarkettone.
Whatmattersiswhatbiginstitutionsthink,becausetheyaretheonesthatcanmoveastockspricedramatically.Therefore,its
yourjobtofindthecompaniesthatinstitutionsperceiveasvaluable.

FundamentalsDrivetheStagesofStockPriceMovement

Virtuallyeverysuperperformancestockmadeitsbiggainwhileinstage2ofitspricecycle.Iasked,Whatcreatedthe
profitablestage2advance?Huntingforakeytoidentifyingtheadventofsecondstages,Iplottedandoverlaidtheunderlying
fundamentalsofsuperperformancestockstoseehowtheycorrelatedwithpricemovement.
Fromafundamentalperspective,thecausealmostalwayswaslinkedtoearnings:fromlacklusterperformancetoupside
surpriseandacceleratinggrowth,eventuallyfollowedbydeceleratinggrowthandthendisappointment.
Theseunderlyingfundamentalchangesdrovebiginstitutionalplayersintoandoutofstocks,phasesthatcouldreadilybe
identifiedbyhugevolumespikesthatoccurredduringboththeadvancingstageandthesubsequentdecline.

SPECIFICENTRYPOINTANALYSIS(SEPA)

FiveKeyElements
Trend:Priceindefiniteuptrend
Fundamentals:Improvementinearnings,revenues,margins
Catalyst:Hotsellingproduct,approvalbyFDA,newCEO,newcontract,etc.
EntryPoints:Enteratalowriskentrypoint
ExitPoints:Establishstoplosspoints.

RankingProcessOverview

PasstheTrendTemplatefilter(seebelow)
Filteredbyearnings,sales,margingrowth,relativestrength,andpricevolatility
ScrutinizeforsimilaritiestoaLeadershipProfiletodeterminewhethertheyareinlinewithfundamentalandtechnicalfactors
exhibitedbypastsuperperformers.
Manualreview,considering
Reportedearningsandsales
Earningsandsalessurprisehistory
EPSgrowthandacceleration
Revenuegrowthandacceleration
Companyissuedguidance
Revisionofanalystsearningsestimates
Profitmargins
Industryandmarketposition
Potentialcatalysts(newproducts,services,orindustry/companyspecificdevelopments)
Performancecomparedwithotherstocksinsamesector
Priceandtradingvolumeanalysis
Liquidityrisk

RankingProcessGoal

Toidentifythepotentialfor
Futureearningsandsalessurprisesandpositiveestimaterevisions
Institutionalvolumesupport(significantbuyingdemand)
Rapidpriceappreciationbasedonasupply/demandimbalance(lackofsellingversusbuying)

RunSeparateScreenstoNarrowDownStocksRatherThanaMegaStockScreen

Youmayinadvertentlyeliminategoodcandidatesthatmeetallyourcriteriaexceptforone.
Abetterapproachistorunseparatescreensthatarebasedonsmallerlistsofcompatiblecriteria.Often,asyourunisolated
screens,youwillseesomeofthesamenamesrecurring,whereasafewnameswillappearononlyonelist.

VALUATION

P/ERatioPitfalls

NomagicP/Enumber
ThereisnoappropriatelevelwhenitcomestoaP/Eratioandsuperperformancestocks.TheP/Ecanstartoutrelativelylow
orhigh.
The25topperformingstocksfrom1995to2005hadanaverageP/Eratioof33x,rangingfromalowof8.6xtoahighof
223x.
Mysuggestionistoforgetthismetricandseekoutcompanieswiththegreatestpotentialforearningsgrowth.
BewareofexcessivelylowP/E
Asaruleofthumb,ImveryreluctanttobuysharesofacompanytradingatanexcessivelylowP/E,especiallyifthestockis
atorneara52weeklowinprice.
WhatP/Etellsyou
IusetheP/Eratioasasentimentgaugethatgivesmesomeperspectiveaboutinvestorexpectation.Generallyspeaking,a
highP/EmeanstherearehighexpectationsandalowP/Emeanstherearelowerexpectations.
PEGdoesntworkeither
LikeitsP/Ecousin,thePEGratiocanexcludesomeofthemostdynamicandprofitablecompaniesfromacandidatebuy
list.ThePEGratioislimitingonthetwosidesoftheequationthataremostvaluable:whenastockhasanexceptionally
highorlowP/E.Shouldastockwithagrowthrateof2%tradeat2timesearnings?Probablynot.However,valuingahigh
technologystocksuchasYahoo!,whichtradedat938timesearnings(andwentto1,700timesearnings),wasnearly
impossibleusingtraditionalvaluationmeasures.
P/Eexpansionofsuperperformers
HistoricalstudyofsuperperformancestocksshowsthattheaverageP/Eincreasedbetween100and200%onaverage
(or2to3times)fromthebeginninguntiltheendofmajorpricemoves.
First,youcangetanideaofastockspotential.Youcanestimatewhatitmightsellforasanaveragebestcasescenario
withinayearortwodowntheroadfromyourinitialpurchaseprice,thatis,ifyourebuyingadynamicleaderinabull
market.YoucouldestimatefutureearningsandapplytheexpandedP/Enumbertogetaroughideaofthestockspotential.
Second,youcangainsomeperspectiveonhowmuchofthecompanysgoodfortunehasalreadybeendiscountedby
gauginghowmuchP/Eexpansionhastakenplacealready.LetssayyoubuyastockwithaP/Eof20atitsinitialbreakout
fromasoundbase.Multiply20by2to3toseewhattheratiocouldriseto.Thatgivesyou40to60.Youhopethatthestock
continuestorally.Thoughitsalwaysprudenttolookforsellsignals,payextraattentiononcetheP/Enears2andespecially
around2.5to3orgreater.Itcouldtopsoonafterward.Ifthisoccurs,lookforsignsofdeceleratinggrowthandsignsof
weaknessinthestockpriceasyoursignaltoreduceyourpositionorsellitout.

TRENDANALYSIS

FourStagesofStockPriceAction

Stage1NeglectPhase:Consolidation
Acompanysearnings,sales,andmarginsmaybelacklusterorerraticalongwithitsshareprice.Theremayalsobean
uncertainoutlookforthecompanyoritsindustry.
Pricemovesinasidewaysfashionwithalackofanysustainedpricemovementupordown.
Priceoscillatesaroundits200day(or40week)movingaverage.Thisphasecanlastformonthsorevenyears.
Often,thisbasingstagetakesplaceafterthestockpricehasdeclinedduringstage4forseveralmonthsormore.
Volumewillgenerallycontractandberelativelylightcomparedwiththepreviousvolumeduringthestage4decline.
TransitionfromStage1toStage2
Thereshouldalwaysbeapreviousrallywithanescalationinpriceofatleast25to30%offthe52weeklowbeforeyou
concludethatastage2advanceisunderwayandconsiderbuying.
Stockprice>150dayMA>200dayMA
200dayMAhasturnedup.
Aseriesofhigherhighsandhigherlowshasoccurred.
Largeupweeksonvolumespikesarecontrastedbylowvolumepullbacks.
Therearemoreupweeksonvolumethandownweeksonvolume.
Stage2AdvancingPhase:Accumulation
Buildupinearningsmomentum(orearningsexpectations).Maybeignitedbybeneficialregulatorychange,apromising
businessoutlook,anewCEO,orabigearningssurprisethatbeatsestimates.
Adailyandweeklypriceandvolumechartwillshowbigupbarsrepresentingabnormallylargevolumeonrallies,
contrastedwithlowervolumeonpricepullbacks.
Stockprice>200dayMA.
150dayMA>200dayMA.
200dayMAitselfisinanuptrend.
Shorttermmovingaveragesareabovelongtermmovingaverages(e.g.50dayMAisabovethe150dayMA).
Stockpriceisinaclearuptrend,definedbyhigherhighsandhigherlowsinastaircasepattern.
Volumespikesonbigupdaysandbigupweeksarecontrastedbyvolumecontractionsduringnormalpricepullbacks.
Moreupdaysandupweeksonaboveaveragevolumethandowndaysanddownweeksonaboveaveragevolume.
Stage3ToppingPhase:Distribution
EPSmomentumstartstoslow,orearningsestimatesbecometoohightobeat.
Volatilityincreases,withthestockmovingbackandforthinwider,looserswings.Althoughtheoverallpricepatternmay
looksimilartostage2,withthestockmovinghigher,thepricemovementismuchmoreerratic.
Thereisusuallyamajorpricebreakinthestockonanincreaseinvolume.Oftenitsthelargestonedaydeclinesincethe
beginningofthestage2advance.Onaweeklychart,thestockmayputinthelargestweeklydeclinesincethebeginningof
themove.Thesepricebreaksalmostalwaysoccuronoverwhelmingvolume.
Thestockpricemayundercutits200dayMA.Pricevolatilityaroundthe200dayMAlineiscommonasmanystocksin
stage3bouncebelowandabovethe200dayMAseveraltimeswhiletoppingout.
The200dayMAwillloseupsidemomentum,flattenout,andthenrolloverintoadowntrend.
Stage4DecliningPhase:Capitulation
Atsomepointtherewillbeanegativesurprise.Thecompanywillmissanearningsestimateorpreannounceearningsand
guideWallStreetanalystslower.
Vastmajorityofthepriceactionisbelowthe200daymovingaverage.
200dayMAwhichwasflatorturningdownwardinstage3,isnowinadefinitedowntrend.
Stockpriceisnearorhitting52weeknewlow.
Stockpricepatternischaracterizedasaseriesoflowerlowsandlowerhighs,stairsteppingdownward.
Shorttermmovingaveragesarebelowlongtermmovingaverages.
Volumespikesonbigdowndaysandbigdownweeksarecontrastedbylowvolumerallies.
Moredowndaysandweeksonaboveaveragevolumethanupdaysandupweeksonaboveaveragevolume.

TrendTemplate(Stockmustpasstobeconsideredinaconfirmedstage2uptrend)

1.Stockprice>50day(10week)MA>150day(30week)MA>200day(40week)MA
2.200dayMAistrendingupforatleast1month(preferably45monthsminimuminmostcases).
3.Stockpriceisatleast30%aboveits52weeklow(manyofthebestselectionswillbe100%,300%,orgreaterabovetheir52
weeklowbeforetheyemergefromasolidconsolidationperiodandmountalargescaleadvance).
4.Stockpriceiswithinatleast25%ofits52weekhigh(theclosertoanewhighthebetter).
5.Relativestrengthranking(asreportedinInvestorsBusinessDaily)isnolessthan70,andpreferablyinthe80sor90s,which
willgenerallybethecasewiththebetterselections.

CounttheBasestoKnowYourReward/RiskWithintheStage2Advance

Withinanoveralllongtermuptrend,therewillbeshortorintermediatetermpriceactionthatconsistofpullbacksandbasing
Mostcommonly,basepatternsformingwithinastage2uptrendlastanywherefrom5to26weeks.
Bases1and2generallycomeoffamarketcorrection,whichisthebesttimeforjumpingonboardanewtrend.
Asthestockmakesaseriesofbasesalongthestage2uptrend,base3isalittlemoreobviousbutusuallystilltradable.
Bythetimea4thor5thbaseoccurs(ifitgetsthatfar),thetrendisbecomingextremelyobviousandisdefinitelyinitslate
stages.
Bythispointabruptbasefailuresoccurmorefrequently.Somestockshowevercanturnupinaparabolicfashionandendina
climaxrunorblowofftop.
Generally,thedescentoccursafter3to5baseshaveformedalongthewayinastage2uptrend.Thelaterstagebases
coincidewiththepointatwhichthestocksaccumulationphasehasbecometooobvious,tappingoutthelastoftheheavy
institutionaldemand.
Stocksveryoftentopoutwhileearningsstilllookgood.Investorswhowaitfortheearningspicturetodimbeforehittingthebid
inthefaceofastage3toporstage4declineoftenendupwithahugelossorattheveryleastgivebackmuchifnotallofwhat
theymadeontheupside.

ExitonaMaterialChangeinPriceBehavior

Ifyourstockexperiencesitslargestdailyand/orweeklypricedeclinesincethebeginningofthestage2advance,thisisasell
signalinmostcasesevenifitcomesontheheelsofaseeminglygreatearningsreport.
Manytimesbeforeafundamentalproblemisevident,therewillbeahintintheformofamaterialchangeinpricebehavior.
Thatchangeshouldalwaysberespectedevenifyoudontseeanyreasonforthesuddenchangeinsentiment.

FOCUSONFUNDAMENTALS

StocksMoveForTwoReasons:AnticipationandSurprise

Everypricemovementisrootedinoneofthesetwoelements:(i)anticipationofnews,anevent,animportantbusinesschange,
or(ii)reactiontoanunexpectedeventandasurprise,whetherpositiveornegative.
[Mynote:Intheanticipationcase,thestockmovementleadstheeventinthereactioncase,thestockmovementlagsthe
event.]

FocusonQuarterlyEarnings

Inourstudyofpastsuperperformancestocks,aswellasintheLoveandReinganumstudies,currentquarterlyearnings
showedthehighestcorrelationwithbigstockpriceperformance.
Threeoutoffourtimes,theverybestperformerswillshowmeaningfulearningsincreasesinthemostrecentquarterfromthe
samequarterayearearlier.
Youshoulddemandnotonlythatthemostrecentquarterbeupbyameaningfulamountbutthatthepast2or3quartersalso
showgoodgains.Reallysuccessfulcompaniesgenerallyreportearningsincreasesof30to40%ormoreduringtheir
superperformancephase.

EarningsMaturationCycle

Stage1
Valuestock
Stage2
Positiveearningssurprise,earningsaccelerate,estimatesrevisedupwards.
Institutionalplayersusingpositivesurprisequantitativemodelsjumpon.
Earningsmomentumbuyersjumpon.
Pricemomentumbuyersjumpon.
Growthstock
Stage3
LossofEPSmomentum
Stage4
Negativeearningssurprise
Estimatesreviseddownwards
Stocksolddown

KeyFundamentals

Earningssurprises
Whenquarterlyresultsaremeaningfullybetterthanexpected,analystsmustrevisetheirearningsestimatesupward.This
increasestheattentionpaidtoastock.
Largebuyersmustbuy/sellovertimetoavoidmovingthepricetoomuch.Thisiswhataccountsforpostearningsdrift,a
persistentbiasinthedirectionofthesurprise.
Beonthelookoutforcompaniesthatarebeatingearningsestimatesthebiggertheearningssurprise,thebetter.Because
earningssurpriseshavealingeringeffect,wewanttofocusoncompaniesthatbeatestimatesandavoidfirmsthathave
negativeearningssurprises.
Trendinganalystestimates
Lookforcompaniesforwhichanalystsareraisingestimates(e.g.comparecurrentestimateswith7daysago,30daysago,
60daysago,90daysago).Quarterlyaswellascurrentfiscalyearestimatesshouldbetrendinghigherthebiggerthe
estimaterevisions,thebetter.
Attheveryleast,Iliketoseethecurrentfiscalyearorthenextyearsestimatestrendinghigherfrom30daysearlierifboth
aretrendinghigher,thatisevenbetter.
TrendingEPS
Smoothoutquarterlyresultsbyusinga2quarterrollingaverageoverthepast4,6,or8quarters.Youwanttoseeasteadily
improvingtrendinearningsgrowth.
Acceleratingearningspershare(EPS)andrevenues
Morethan90%ofthebiggeststockmarketwinnersshowedsomeformofearningsaccelerationbeforeorduringtheirhuge
pricemoves,i.e.yearoveryearearningsweregrowingbyanincreasedratesequentially,quartertoquarter.
Itsnotuncommonfornewmarketleaderstoshowtripledigitsalesgrowthinthemostrecenttwo,three,ormorequarters.In
fact,somegreatstockmarketsuccessesdeliverlargequarterlysalesincreasesconsistentlyforseveralyears.
Whatreallyaccountsforsuperiorstockperformanceisstrongearningsgrowthbackedbybrisksales.
EPSbreakout
Goback2to4yearsormoretoarecordyearandseeifcurrentearningsarebreakingoutabovetheprevioustrend.Itcan
beafairlysignificanteventifearningssuddenlybreakouttotheupsidefromtherangethatwasestablishedoverseveral
years.
StrongannualEPSchange
Strongquarterlyresultsshouldtranslateintostrongannualresults.Just1or2quartersofgoodearningsisntgoingtobe
enoughtodriveastockspricesignificantlyhigherforanextendedperiod.
Turnaroundsituations
Withturnaroundsituations,investorsshouldinsistthatthecurrentearningsbeverystrong(+100%orbetterinthemost
recent1or2quarters).
Youcouldalsoinsistthatearningsandmarginsbeatorclosetoanewhighforaddedconfirmationthatthecompanyis
backontrack.
Youcanspotturnaroundsbycomparingthecurrentannualgrowthrateorcurrentquarterlyresultswiththe3or5year
growthrate.
Decelerationisaredflag
Acompanycanbedoinggreatwithhighdoubledigitpercentagegrowthandthendeterioratetomiddoubledigitgrowth
(e.g.60%dropto30%ismaterialdeterioration)

ASSESSINGEARNINGSQUALITY

SustainableEarningsGrowthRequiresRevenueGrowth

Earningsimprovementfromcostcutting,plantclosures,andothersocalledproductivityenhancementswalksonshortlegs.
Theidealsituationiswhenacompanyhashighersalesvolumewithnewandcurrentproductsinnewandexistingmarketsas
wellashigherpricesandreducedcosts.
Theworstsituationiswhenacompanyhaslimitedpricingpower,itsbusinessiscapitalintensive,marginsareloworunder
pressure,anditsfacedwithheavyregulation,intensecompetition,orboth.

AssessingEarningsQuality

Lookforearningsfromcoreoperations.Gainsfromonetimeorextraordinaryeventsshouldbestrippedaway.
Ontheflipside,ifonetimechargeskeepshowingupoverandover,youshouldseriouslyquestiontheearningsquality.
Bewareofapositiveearningssurprisefromaloweredestimate.Ifyouseethatestimaterevisionswererecentlylowereddueto
downsideguidance,andthenthecompanybeatexpectations,thisshouldraisearedflag.

WatchtheMarketsReactiontoCompanysEarnings

Threespecificreactions
Whatwastheinitialresponse?
Ifthestocksoldoff,diditrecoverquicklyandpowerfully?Ordiditfailtorallyafterapullbackor,worse,selloff?
Howwelldidthestockholditsgainsandresistprofittaking?
Althoughitsnotuncommonforstockstoselloffonprofittakingafterabigrallyanddeclineonnews,asuperperformancestock
willcomebackandresumeitsadvance.Foratruesuperperformer,thereshoulddefinitelynotbeahugeselloffthatbreaksthe
wholelegofthestocksupwardmove.

TrackCompanyIssuedGuidance

Companiesgenerallyissueguidanceatornearthetimeaquarterlyearningsreportisreleased.
Insomecases,thereactiontoearningsguidanceisstrongerthanthereactiontotheactualearningsreportwhenitis
announced.
Bytrackingwhatacompanysaysandthenwhatdevelopslateron,youcanascertainthequalityandtendenciesofthe
companysguidance.
Takelongtermforecastswithagrainofsalt.Noone,notevenmanagement,canaccuratelyforecastwhatacompanywillearn
orwhatitsrateofgrowthwillbeayearortwodowntheroad.

AnalyzeInventoriesandReceivables

Forcertainindustries,suchasmanufacturing,thecomparisonofinventoryandsalesiscrucial.Specifically,Ilookatthe
breakdownofinventory(i.e.finishedgoods,workinprogress,andrawmaterials)andhow[thegrowthrateof]eachsegment
relatestothe[thegrowthrateof]others.
Lookatthetrendininventoriesversussales.Wheninventorygrowsmuchfasterthansales,itcanindicateweakeningsales,
misjudgmentbymanagementoffuturedemand,orboth.
Inventoriescanprovideaheadsupastowhetherbusinessconditionsarelikelytoimprove.E.g.inlate2003200,therewas
rapidescalationinthepriceofcopper.EncoreWire(WIRE)hadsignificantcopperinventoriesandmettheSEPAcriteria,soit
wasapotentialbigwinner.
Ifreceivablesareincreasingatafargreaterratethansalesorifthetrendisaccelerating,thiscouldbeawarningthatthe
companyishavingtroublecollectingfromitscustomers.
LookOutforDifferentialDisclosure

GuidelinesforreportstoshareholdersarefarlessrestrictedthanthoseforreportssubmittedtotheSECMakeapointto
comparefootnotesandotherdisclosuresrelatedtotaxesunderthecashbasisaccountingrulesrequiredfortheInternal
RevenueService(IRS)withtheearningsreportedtoshareholdersunderaccrualaccounting.Ifacompanyisreportinggreat
earningsbutisnotpayingmuchintaxes,beskeptical.

LookforaCode33

ACode33situationiswhentherearethreeconsecutivequartersofaccelerationinearnings,sales,andprofitmargins.
Ifacompanyhashotsellingproducts,salesshouldincreaseasthecompanyexpandsintonewmarkets.
Ifacompanyhasamanagementteamthatsontheball,profitmarginsshouldimproveasthecompanyimprovesproductivity.

FOLLOWTHELEADERS

TheBigMoneyisMadeintheBullMarketsFirst18Months

Mostofthebigmoneymadeinbullmarketscomesintheearlystages,duringthefirst12to18months.
Asabearmarketisbottoming,leadingstocks,theonesthatbestresistedthedecline,willturnupfirstandthensprintahead
days,weeks,orevenmonthsbeforetheDow,S&P,andNasdaqindexesputontheirrunningshoes.

IdentifyingtheMarketLeaders

Marketleadersarestocksthatemergefirstandhitthe52weekhighlistjustasthemarketisstartingtoturnup.
Fewinvestorsbuystocksnearnewhighs,andmostinvestorsfocusonthemarketinsteadoftheindividualmarketleadersand
oftenendupbuyinglateandowninglaggards.

UseaBottomUpApproachwithLeaders

Dontconcentrateonthegeneralmarket
Ifyouconcentrateonthegeneralmarketsolelyfortimingyourindividualstockpurchases,yourelikelytomissmanyofthe
reallygreatselectionsastheyemergeatorclosetoamarketbottom.Thetruemarketleaderswillshowstrongrelativeprice
strengthbeforetheyadvance.
Dontconcentrateontheindustrygroups
Althoughitstruethatmanyofthemarketsbiggestwinnersarepartofindustrygroupmoves,inmyexperience,oftenbythe
timeitsobviousthattheunderlyingsectorishot,therealindustryleaderstheverybestofthebreedhavealready
movedupdramaticallyinprice.
Intheearlystageofarelativestrengthleadersuptrend,theremayormaynotbemuchconfirmingpricestrengthfromits
groupoverall.ThisisnormalAstheleaderstrendcontinuestoadvanceandeventuallyitsindustrygroupandsector
begintoshowsignsofstrength,thepriceadvanceofthemarketleaderwilldooneoftwothings:itwillcontinueitsadvance
whilethegrouppropelsitevenhigher,oritwillconsolidateinasidewaysfashionanddigestitspreviousgainswhilethe
groupandotherstocksinthegroupplaycatchup.Youshouldlookfordefinitesignsthatthestockhastoppedbefore
concludingthatthemoveisover.
Focusonthestocks
Thestocksthatholdupthebestandrallyintonewhighgroundoffthemarketlowduringthefirst4to8weeksofanewbull
marketarethetruemarketleaders,capableofadvancingsignificantly.Youcantaffordtoignorethesegoldenopportunities.
Marketleaderstendtostandoutbestduringanintermediatemarketcorrectionorinthelaterstagesofabearmarket.Look
forresilientstocksthatholdupthebest,reboundthefastest,andgainthemostpercentagewiseoffthegeneralmarket
bottom.
Whenamarketisbottoming,thebeststocksmaketheirlowsaheadoftheabsolutelowinthemarketaverages.Asthe
broadermarketaveragesmakelowerlowsduringthelastlegdown,theleadersdivergeandmakehigherlowsThe
relativestrengthlineofthestockshouldshowsteadyimprovementasthemarketdeclines.
Often,stocksthatholdupwellduringbearmarketcorrectionsareintheirownearningsupcycleWhenthebearishmarket
exhaustsitselfandturnsup,stocksintheirownearningsupcyclewillblastoffandadvancesignificantly,insomecasesfor
anextendedperiod.

SpecificIndustryGroupsLeadNewBullMarkets

Ingeneral,3or4toasmanyas8to10industrygroupsorsubgroupsleadanewbullmarket.Yourportfolioshouldconsistof
thebestcompaniesinthetop4or5sectors.
Stocksleadyoutothegroup
Tofindwhichgroupsareleading,trackthe52weeknewhighlist.Theindustrygroupswithahealthynumberofstocks
hittingnewhighsearlyinabullmarketwilloftenbetheleaders.
Historically,morethan60%ofsuperperformancestockswerepartofanindustrygroupadvance.
Keepaneyeonthetop2or3companiesinanindustrygroup.Iftheybreakdownafterabigadvance,itisoftentheinitial
symptomthattheentiregroupisabouttogetsick.

ANewBullMarketTypicallyLocksOutInvestors

Duringthefirstfewmonthsofthenewbullmarketyoushouldseemultiplewavesofstocksemergingintonewhighground
generalmarketpullbackswillbeminimalandprobablywillbecontainedto3to5%frompeaktotrough.
Manyinexperiencedinvestorswillbelookingtobuyapullbackthatrarelymaterializesduringtheinitiallegofanewpowerful
bullmarket,whichfromtheonsetwillappeartobeoverbought.
Todetermineiftherallyisreal,updaysshouldbeaccompaniedbyincreasedvolumewhereasdowndaysorpullbackshave
loweroverallmarketvolume.Moreimportant,thepriceactionofleadingstocksshouldbestudiedtodetermineifthereare
stocksemergingfromsoundbuyablebases.
Additionalconfirmationisgivenwhenthelistofstocksmakingnew52weekhighsoutpacesthe52weeklowlistandstartsto
expandsignificantly.

KeepingYourWatchList

Asthebroadermarketindexesstarttobottomandbeginthefirstlegupinanewbullmarket,youshouldconcentrateonthe
new52weekhighlist.Manyofthemarketsbiggestwinnerswillbeonthelistintheearlystageofanewbullmarket.
Youshouldalsokeepaneyeonstocksthatheldupwellduringthemarketsdeclineandarewithinstrikingdistance(5to15%)
ofanew52weekhigh.
Generally,thecorrectionforahealthystockfrompeaktolowwillbecontainedwithin25to35%andduringseverebear
marketdeclinescouldbeasmuchas50%,buttheless,thebetter.
Fewerthan25%ofmarketleadersinonecyclegenerallyleadthenextcycle,soexpecttoseeunfamiliarnames.

BuytheStrongestLeadersFirst

Comingoffamarketlow,Iliketobuyinorderofbreakout.Thebestselectionsinyourlineupwillbethefirsttoburstforthand
emergefromaproperbuypointandintonewhighground.

LeadersLeadontheDownside

Afteranextendedrallyorbullmarket,themarketstrueleadershavealreadymadetheirbigmoves.Thesmartmoneythat
movedintothosestocksaheadofthecurvewillmoveoutswiftlyatthefirsthintofslowinggrowth.
Historyshowsthatonethirdofsuperperformersgivebackallormoreoftheirentireadvance.Onaverage,theirsubsequent
pricedeclinesare50to70%,dependingontheperiodmeasured.
Bullmarketssometimesrollovergradually,whereasbottomsoftenendwithasuddenselloff,followedbyastrongrally.Asthe
leadersstarttobuckle,theindexescanmoveupfartherorstarttochurn,movingsideways.Thatoccursbeforecashstaysin
themarketandrotatesintolaggardstocks.Theindexesholduporeventrackhigheronthebacksofthestragglers.Watchout!
Whenthathappens,theendisnearandthereallygreatopportunitiesmayhavealreadypassed.
Typically,asecondwaveofpostleadershipstocksstarttoperformrelativelywellasmoneyrotatesoutofthetrueleadersand
intosomeofthegroupsconstituents,laggardfollowupstocks,ordefensivegroupssuchasdrugs,tobacco,utilities,andfood
stocksthatarethoughttobelesssensitivetoaneconomicdownturn.

READINGTHECHARTS

PlaytheContinuationofanExistingTrend

MostofthechartworkIrelyonisbasedonthecontinuationofanexistingtrendIfyouwanttomaximizecompounding,you
wanttobewheretheactionisandtakeadvantageofmomentum.
Youshouldlimityourselectionstothosestocksdisplayingevidenceofbeingsupportedbyinstitutionalbuying.Yourenot
tryingtobethefirstoneonboardratheryourelookingforwheremomentumispickingupandtheriskoffailureisrelatively
low.
Totimemyentry,Ilookforpriceconsolidations,.whicharemomentarypausesorperiodsofrestwithinthecontextofaprior
uptrend.
Thecurrentchartpatternisonlyasgoodaswhereitresideswithinthecontextofitslongertermtrend.Ifyouaretooearly,you
runtheriskofthestockresumingitsdowntrend.Ifyouretoolate,youruntheriskofbuyingalatestagebasethatisobviousto
everyoneandpronetofailure.
Inevergoagainstthelongtermtrend.Ilooktogolongastage2uptrendandgoshortastage4downtrend,plainandsimple.

PriceOftenSpikesPrecedingaConsolidation

Oftenapricespikewilloccurontheleftsidejustbeforeapricecorrectionorconsolidationbegins.
Thismaycomeonnewsandcausethestocktobecomeextendedandpronetoapullback,particularlyiftheoverallmarket
beginscorrecting.

LookforaVolatilityContractionPattern(VCP)

Pattern
Acommoncharacteristicofvirtuallyallconstructivepricestructures(thoseunderaccumulation)isacontractionofvolatility
accompaniedbyspecificareasinthebasestructurewherevolumecontractssignificantly.
Depth
DuringaVolatilityContractionPattern(VCP),youwillgenerallyseeasuccessionofanywherefrom2to6contractions,with
thestockcomingoffinitiallyby,say,25%fromitsabsolutehightoitslow.Thenthestockralliesabit,andthenitsellsoff
15%.Thenbuyerscomebackin,andthepricegoesupsomemore,andfinallyitretreats8%.Theprogressivereductionin
pricevolatility,whichwillbeaccompaniedbyareductioninvolumeatparticularpoints,eventuallysignifiesthatthebase
hasbeencompleted.
Asaruleofthumb,Iliketoseeeachsuccessivecontractioncontainedtoabouthalf(plusorminusareasonableamount)of
thepreviouspullbackorcontraction.Thevolatility,measuredfromhightolow,willbethegreatestwhensellersrushtotake
profits.Whensellersbecomescarcer,thepricecorrectionwillnotbeasdramatic,andvolatilitywilldecrease.
Width
Typically,mostVCPssetupswillbeformedby2to4contractions,althoughsometimestherecanbeasmanyas5or6.
Timeframe
Thetimeperiodofthepriceactioncanbeover3toasmanyas60weeks.
Useabbreviationsasaquickwaytocapturethevisual
Time:Howmanydaysorweekshavepassedsincethebasestated?
Price:Howdeepwasthelargestcorrection,andhownarrowwasthesmallestpullbackattheveryrightofthepricebase?
Symmetry:Howmanycontractions(Ts)didthestockgothroughduringthebasingprocess?
Example
40W31/34T:40weekconsolidation,contracted4times,firstcontractionwasdeepestat31%,lastcontractionwas
shallowestat3%.
Mynote:Multiplecontractionsofthesamedepthwouldbelabelledas1T.

AVariation:FlatBase

Therearesomevariations,suchasthesquareshapedDarvasboxpattern,oraflatbasestructurethatis4to7weeksin
duration.
Withthistypeofbase,thereisnorealvolatilitycontractionasitremainsatightandnarrowpatternorbox,movingina
sidewaysrangewithabouta10to15%correctionfromhighpointtolowpoint.

TightnesswithLowVolume(TightandLight)isGenerallyConstructive

Tightnessinpricefromabsolutehighstolowsandtightcloseswithlittlechangeinpricefromonedaytothenextandalsofrom
oneweektothenextaregenerallyconstructive.
Thesetightareasshouldbeaccompaniedbyasignificantdecreaseintradingvolume.Insomeinstances,volumedriesupat
ornearthelowestlevelsestablishedsincethebeginningofthestocksadvance.
Ifastockisunderaccumulation,apriceconsolidationrepresentsaperiodwhenstronginvestorsultimatelyabsorbweak
traders.Oncetheweakhandshavebeeneliminated,thelackofsupplyallowsthestocktomovehigherbecauseevena
smallamountofdemandwilloverwhelmthenegligibleinventory.Thisisreferredtoasthelineofleastresistance.

BuyatthePivotBuyPoint

Astockthatisunderaccumulationwillalmostalwaysshowthesecharacteristics(tightnessinpricewithvolumecontracting).
Thisiswhatyouwanttoseebeforeyouinitiateyourpurchaseontherightsideofthebase,whichformswhatwecallthepivot
buypoint.Specifically,thepointatwhichyouwanttobuyiswhenthestockmovesabovethepivotpointonexpandingvolume.
Duringthetightestsectionoftheconsolidation(thepivotpoint),volumeshouldcontractsignificantly.
WhenastocktracesoutaVCPandundergoesaseriesofcontractions,,[itis]anindicationthatthestockischanginghands
inanorderlymanner.Youshouldwaituntilthestockgoesthroughanormalprocessofshareschanginghandsfromweak
holderstostrongones.Asatraderusingastoploss,youareaweakholder.Thekeyistobethelastweakholderyouwantthe
otherweakholderstoexitthestockbeforeyoubuy.
Evidencethatsupplyhasstoppedcomingtomarketisrevealedasthetradingvolumecontractssignificantlyandpriceaction
quietsdownnoticeably.Ifthestockspriceandvolumedontquietdownontherightsideoftheconsolidation,chancesare
thatsupplyisstillcomingtomarketandthestockistoorisky.
JesseLivermoredescribedthepivotpointasthelineofleastresistance.Astockcanmoveveryfastonceitcrossesthis
threshold.Whenastockbreaksthroughthelineofleastresistance,thechancesarethegreatestthatitwillmovehigherina
shortperiodoftime.Thisisthecasebecausethispointrepresentsanareawheresupplyislowtherefore,evenasmall
amountofdemandcanmovethestockhigher.

VolumeDriesUpatthePivotPoint

Everycorrectpivotpointwilldevelopwithacontractioninvolume,oftentoalevelwellbelowaverage,withatleastoneday
whenvolumecontractsverysignificantly,inmanycasestoalmostnothingornearthelowestvolumelevelintheentirebase
structure.
Infact,wewanttoseevolumeonthefinalcontractionthatisbelowthe50dayaverage,with1or2dayswhenvolumeis
extremelylow.Thismaynotalwaysoccurinthelargestcapstocks,butinsomeofthesmallerissues,volumewilldrytoa
trickle.
Thedecreasedvolumemeansthatstockhasstoppedcomingtomarket.Thisispreciselywhatoccursrightbeforeastockis
readytomakeabigmove.Withverylittlesupplyofstockinthemarketfromsellers,evenasmallamountofbuyingcanmove
thepriceupveryrapidly.

BuyonBreakout

AfterthelastnarrowcontractioninaVCPpatternonlightvolume,ideallyyouwanttoseeanupwardmoveinthemakingon
strongerthanusualvolume.
Extrapolatethedaysvolumebasedontheintradayvolumethusfar.Whentheexpectedvolumeexceedstheaveragedaily
volume,whenthepricegoesthroughthepivotpoint,youcanplaceyourtrade.
Letthestockbreakabovethepivotandproveitself.Assumingthatastockwillbreakoutisdangerous.Ifthepivotpointistight,
thereisnomaterialadvantageingettinginearly,youwillaccomplishlittleexcepttotakeonunnecessaryrisk.
Notallconsolidationshavetightpivotpoints.Whenaflatbaseoccurswithnorealpivototherthanthehighofthebase,an
investorcanlooktobuyasthestockmovesabovethehighestpriceatthetopofthebaseprovidedthatthebasecorrectsno
morethan10or15%.
Otherpricepatterns,suchasacupcompletioncheat(3C),oracupwithhandle,canformpivotpointsbelowthehighofthe
overallstructure.

CupCompletionCheat(3C)Pattern

Thecheatareaisapauseareawherethecupportion(ofthecupwithhandlepattern)isbeingcompleted.Avalidcheatarea
shouldexhibittightnessintherangeofpriceaswellasacontractioninvolume.
Thispausepresentsanopportunitytoenterthetradeattheattheearliestpoint,perhapsnotalwayswithyourentireposition,
butyoucanloweryouraveragecostbasisbyexploitingcheatareastoscaleintotrades.Youdontwanttobeinvolvedany
earlierthanthispoint.
ItiscommonforacheatsetuptodevelopduringageneralmarketcorrectionThekeyistorecognizewhenthestockhas
bottomedandidentifywhenthestartofanewuptrendisunderway,backinsyncwiththeprimarystage2.
Toqualify,thestockshould
Havealreadymovedupbyatleast25to100%andinsomecasesby200or300%duringtheprevious3to36
monthsoftrading[priortothecup].
Betradingaboveitsupwardlytrending200daymovingaverage.
Thepatterncanforminasfewas3weekstoasmanyas45weeks(mostare7to25weeksinduration).
Thecorrectionfrompeaktolowpointvariesfrom15or20%to35or40%insomecasesandasmuchas50%,depending
onthegeneralmarketconditions.Correctionsinexcessof60%aretoodeepandareextremelypronetofailure.
Thecheatshouldbecontainedwithin5%to10%fromhighpoint[ofthecheat]tolowpoint[ofthecheat].
Theoptimumsituationistohavethecheatdriftdowntowherethepricedropsbelowapriorlowpoint,creatingashakeout,
exactlythesamethingyouwouldwanttoseeduringtheformationofahandleinacupwithhandlepattern.
Thestockissetupandreadytobepurchasedasitmovesabovethehighofthepause.

PowerPlayPattern

Toqualifyasapowerplay,thefollowingcriteriamustbemet
Anexplosivepricemovecommencesonhugevolumethatshootsthestockpriceup100%ormoreinlessthan8weeks.
Thisgenerallyoccursafteraperiodofrelativedormancy.
Thestockpricethenmovessidewaysinarelativelytightrange,notcorrectingmorethan20to25%overaperiodof3to6
weeks(somecanemergeafteronly12days).
Thereisverytightpriceactionthatdoesntcorrectthestockmorethan10%,orthestockmustdisplayVCPcharacteristics.
Thisisalsoreferredtoasahightightflag.Thefirstrequirementisasharppricethrustupward.Thesesetupscanmovethe
fastestintheshortestperiodoftimesvelocitybegetsmorevelocity.Thispatternoftensignalsadramaticshiftintheprospects
ofacompany.
ThisistheonlysituationIwillenterwithadearthoffundamentals.Withthepowerplay,thestockisexhibitingsomuchstrength
thatitstellingyouthatsomethingisgoingonregardlessofwhatthecurrentearningsandsalesareshowingyou.

LookforthePrimaryBaseAfterIPO

Aprimarybaseisthefirstbuyablebaseafteracompanyhasgonepublic.Thebaseformsduringacorrectiveperiodof3
weeksorlongerthatisfollowedbytheemergencetoanalltimehighorfromaconstructiveconsolidationnearthestocksall
timehigh.
SomeIPOscantakeuptoayearormoretoformaproperbase.Inmostcases,youshouldinsistthatthestockputinabaseof
atleast3to5weeksandnotcorrectmorethan25to35%tobereliable.
Correctionsthatlastlonger(usuallyaroundoneyear)sometimesresultinadeclineofasmuchas50%,yetthesetupcanstill
besound[mynote:agreaterallowanceforthedepthofdeclineisgivenduetothelengthoftime].Shorter3week
consolidationsshouldnotcorrectmorethan25%.
Thebiggestpartofacompanysgrowthusuallyoccursinthefirst5to10yearsafterthecompanyissuescommonstockand
goespublic.

DontEnterJustOnATrendlineBreach

Theproblemisthatalthoughatrendlinehasbeenbroken,insteadofstartinganewtrend,thestockcouldjusthavemadea
momentarymoveintheotherdirectionuntiltheprevailingtrendresumes.
Howcanyoutellwhenanewtrendisinforce?TheansweristowaitforthestocktoturnTheoddsincreasedramaticallyin
yourfavorifyouwaitforthestocknotonlyto(i)rallyandbreakitsdowntrendbut(ii)forthepricetopauseandthenfollow
throughbeforeyouplaceatrade.
Thespottobeginbuyingisjustasthehighofthepauseistakenout.Thiscouldoccuratthecheatareaorthehandle.

WhyBuyNearaNearHigh

Astockhittinganewhighhasnooverheadsupplytocontendwith.Incontrast,astocknearits52weeklowatbesthas
overheadsupplytoworkthroughandlacksupsidemomentum.
TASRadvanced540%toreachanalltimehigh,thenadvancedanadditional1800%.
YHOOadvanced170%toreachanalltimehigh,thenadvancedanadditional4300%.
MSFThitanalltimehighin1989,andadvanced54fold.
MNSThitanalltimehighinAug2003,thenadvanced8000%.
DeepCorrectionPatternsareFailureProne

Mostconstructivesetupscorrectbetween10%and35%.Irarelybuyastockthathascorrected60%ormoreastockthatis
downthatmuchoftensignalsaseriousproblem.
Undermostconditions,stocksthatcorrectmorethan2or3xthedeclineofthegeneralmarketshouldbeavoided.

TooShortaTimePeriodisHazardous

Abuildupofsupplytakestimetodigestandworkthorough.Aquickupanddowngyrationdoesntgivethestockenoughtime
toweedouttheweakholdersittakestimeforthestronghandstorelievetheweakerplayers.
Dependingonthedepthofthecorrection,aproperbasingperiodcanlastanywherefrom3weekstoaslongas65weeks.

LookforPriceShakeoutstoImproveYourOdds

Shakeoutsallowfortheeliminationofweakholdersandallowasustainedmovehigher.
Majorsupportareasareobvioustoamateursandthereforeshouldbeobvioustrapstoprofessionals.Likeaminefield,theyre
filledwithstops,readytoblowwhenthesharepricebrushesthetripwire.
Totheextentthatyouidentifybaseformationsthathaveexhibitedanddigestedshakeoutsbeforeyourentry,youarelesslikely
tobethrownfromthesaddle.Informedinvestorswhounderstandpriceactionareonthelookoutforevidenceofprice
shakeoutswithinthebasebeforetheybuy.
Whenastockthatisseeminglyintheprocessofbuildingabaseundercutsasupportfloor,itmaybeapriceshakeout,orthe
stockcouldbeenteringaprecipitousorsustaineddecline.Thisiswhyyouwaittoseeifitresultsinashakeout.Ideallyyou
wanttoseethisoccur1,2,or3times,dependingonthesizeandmagnitudeofthepricebase,beforeyouenterthetrade.
Shakeoutscanoccuratthelowsofabase,ontherightside,andinthehandleorpivotarea.

LookforSignsofInstitutionalAccumulation

Asignofaccumulationisaspikeupinprice.Pricespikesgenerallyoccuroffthelowsofacorrectionwithinthebaseandon
therightsideofthebasethiskindofpriceactiongainscredenceifitisaccompaniedbyoutsizedvolume.Aspikeinpriceon
overwhelmingvolumeoftenindicatesinstitutionalbuying,whichisexactlywhatwerelookingfor.Afterapriceshakeout,itsa
goodsignifthestockralliesbackonbigvolume.
Pricemagnitude
Astockmayexperiencebigpricespikesintheformofgaps.Gapupsaccompaniedbyasurgeofvolumereflectsstrong
demand.
Avoidastockthatfollowsabigdemanddaywithevenbiggerdowndaysonvolume.
Volumemagnitude
Youllwanttoseeadearthofdownspikes.Inotherwords,thevolumemustbemuchbiggeronupdaysthanondowndays,
andafewofthepricespikestotheupsideshouldbelarge,dwarfingthecontractionsthathaveoccurredonrelativelylower
volume.
Frequency
Lookforbigupdaysthatarelargerandoccurmorefrequentlythanbigdowndays.

HandlingBreakoutDay(EntryDay)Issues

Squats
Sometimesastockwillbreakoutfromapivotpointonlytofallbackintoitsrangeandcloseoffthedayshigh.ThisiswhatI
refertoasasquat.
Whenthishappens,IdontalwaysjumpshiprightawayItrytowaitatleastadayortwotoseeifthestockcanstage
areversalrecoveryInsomecasesitcantakeupto10daysorlongerforarecoverytooccur.
Ifthepriceactiontightensandvolumesubsides,thesetupcouldbeimproving,anditcouldbethatyouvejustenteredthe
tradeabitearly.
EarlyDayReversal
Anearlydayreversaloccurswhenastockmovesupinthemorningandthencomesbackdowntothebreakoutbefore
noonor1:00p.m.
Thestockmayevenundercutyourpurchaseprice.Trytogivethestockuntiltheendofthedayunlessthereversalisso
severethatittriggersyourprotectivestop.
Sticktoyourgameplanandholdtoyouroriginalstoploss.Inahealthymarket,oftenstocksthatdothiswillrecoverlaterin
thedayandclosestrong.
20dayMovingAverageViolation
Ifthereversal[onthebreakoutday]causesthepricetoclosebelowits20daymovingaverage,itlowerstheprobabilityof
successanditbecomesajudgmentcallsometimesIsellifthishappens.However,aslongasthepriceholdsabovemy
stoploss,Itrytogivethestocksomeroom.
Oncethestocksuccessfullybreaksout,thestockpriceshouldholdits20daymovingaverageandinmostcasesshould
notclosebelowit.
Ifitpullsin,holdsabovethe20dayaverage,andsquats,oftenthestockwillrecoverthenextdayorwithinafewdays.
However,ifithitsyourstop,getoutandreevaluate.
StopViolation
Ofcourse,ifthereversalislargeenoughtotriggermystop,Isell.
Volatility
Thepatternshouldnotgetwider(meaningupanddownmovements).Upisgood,butwildswingsbackandfortharenot.
HandlingIssuesWhileinPosition

Pullbacks
Often,astockwillemergethroughapivotpointandthenpullbacktoorslightlybelowthatinitialbreakoutpoint.Thisis
normalaslongasthestockrecoversfairlyquicklywithinanumberofdaysorperhapswithinonetotwoweeks.
Shakeouts
IfIamknockedoutofastock,Ikeepthestockonmyradartoseeifitresetstechnically.Thefactthatithadashakeout
couldturnouttobeconstructiveforthestockgoingforward.
Apivotfailuredoesntnecessarilycauseanoutrightbasefailure,instead,itcanresetanewentrypointusuallywithina
numberofdaysorweeks.

TheLivermoreSystem

JesseLivermorehadasystemofbuyingandsellingwhenastockchangeddirection,butonlyifthestockfollowedthrough.
Bywaitingforastockspricetoconfirmanewuptrend,heavoidedbeingwhipsawedoneveryminorcountertrendrally.
Instead,Livermorewaitedforthetrendtobebrokenandtworeactionarypullbackstotakeplacethen,asthestocktraded
abovethesecondreactionhigh,hewouldenteratrade.
[Mynote:Downtrend>>HH>>HL>>HH>>HL>>HH(enterwhenthehighistakenoutafteranaturalreaction)]

RISKMANAGEMENT

NoSuchThingAsHouseMoney

OnceImakeaprofit,thatmoneybelongstome.Yesterdaysprofitispartoftodaysprincipal.Myaccountsimplyhasanew
startingbalance,subjecttothesamesetofrulesasbefore.
Onceastockmovesupadecentamountfrommypurchaseprice,Iusuallygiveitlessroomonthedownside.Igointoaprofit
protectionmode.Attheveryleast,Iprotectmybreakevenpoint.Imcertainlynotgoingtoletagoodgainturnintoaloss.
Imnotsuggestingthatyounotallowastocktogothroughanormalreactionorpullbackinpriceifyoubelievethestockcango
muchhigher.Ofcourse,youshouldgivestockssomeroomtofluctuate,butthatleewayhaslittletodowithyourpastgain.
Evaluateyourstocksonthebasisofthereturnyouexpectfromtheminthefutureversuswhatyourerisking.Eachday,astock
mustjustifyyourconfidenceinholdingitforagreaterprofit.

SetaMaximumDownsideLossLimit

Setanabsolutemaximumlineinthesandofnomorethan10%onthedownside.
Youraveragelossshouldbemuchless,maybe6or7%.
Ifyoucantbecorrectonyourpurchasewitha10%cushionfornormalpricefluctuation,youhaveadifferentproblemto
address.Eitheryourselectioncriteriaandtimingareflawedortheoverallmarketishostileandyoushouldbeoutofstocks.

TryaLossAdjustmentExercise

Adjustallofyourpastlossestoanarbitrarylevelof10%toseewhattheeffectofcappingthedownsidewouldbe.This
includedadjustingthelossesthatweresmallerupto10%aswellasadjustingtheonesthatwerelargerdown.
Cappingthelosseswouldhaveknockedmeoutofafewofmywinnershoweverthisconsequencewasoverwhelmedbythe
losscuttingeffectInsteadofhavingadoubledigitpercentagelossinmyportfolio,Iwouldhavehadagainofmorethan
70%.
Fromthatpointon,Igrewveryriskaverse,andmyresultsimproveddramatically.

WhentheStockGoesDown,YouKnowYoureWrong

Whenastockyouhaveboughtfallsbelowyourpurchaseprice,itistellingyouhavemadeanerrorataminimumintiming.
Makenomistake,whetheryoureashorttermtraderoralongterminvestor,timingiseverything.Justasmuchmoneyislost
ongreatcompaniesboughtatthewrongtimeasoninvestmentsthatwerepoorchoicesinthefirstplace.

OnlyOneWaytoPreventaLargeLoss

Sellwhenyouhaveasmalllossbeforeitsnowballsintoahugeone.
MytradingresultswentfrommediocretooutstandingonceIfinallymadethedecisiontodrawalineinthesandandvowed
neveragaintoletalossgetoutofcontrol.

BeanExactingOpportunist

Inthestockmarket,youhavetheluxuryofbeingabletostayonthesidelines,freeofcharge,observingandwaitingforthe
mostopportunemomenttowager.Yougettoseethemarketscardsbeforeyoubet,freeofcharge.Thisisawonderful
advantage,yetfewexploitit.
Beselectiveandpickyourentryspotsverycarefully.Waituntiltheprobabilitiesarestackedinyourfavorbeforeyouact.
Withpatienceanddiscipline,youcanprofitfrommarketopponentswhoarelessdisciplinedandlesscapablethanyouare.
Whileyoudonothing,lessskilledopponentsarelayingthegroundworkforyoursuccess,andyougettowaitandwatchfor
free.
DevelopContingencyPlansthatHandleVirtuallyEverySituation

BeforeIinvest,Ihavealreadyworkedoutinadvanceresponsestovirtuallyanyconceivabledevelopmentthatmaytakeplace.
Beforetheopenofeachtradingday,mentallyrehearsehowyouwillhandleeachpositionbasedonwhatevercouldpotentially
unfoldduringthatday.Then,whenthemarketopensfortrading,therewillbenosurprisesyoualreadyknowhowyouwill
respond.

FourBasicContingencyPlans

Initialstoploss
Establishinadvanceamaximumstoploss.
Themomentthepricehitsthestoploss,Isellthepositionwithouthesitation.
Reentry
Whenthemarketexperiencesgeneralweaknessorhighvolatility,yourstockcanundergoacorrectionorsharppullback
thatstopsyouout.However,astockwithstrongfundamentalscanresetaftersuchacorrectionorpullback,forminganew
baseorapropersetupOften,thesecondsetupisstrongerthanthefirst.Thestockhasfoughtitswaybackandalongthe
wayshakenoutanotherbatchofweakholders.Ifitbreaksoutofthesecondbaseonhighvolume,itcanreallytakeoff.
Ifthestockstillhasallthecharacteristicsofapotentialwinner,lookforareentrypoint.Yourtimingmayhavebeenoff.It
couldtake2oreven3triestocatchabigwinner.
Sellingataprofit
Onceastockamassesapercentagegainthatisamultipleofyourstoploss,youshouldrarelyallowthatpositiontoturninto
aloss(e.g.stoplossof7%,ifyouhave20%gain,movestoptobreakevenortrailstoptolockinmajorityofthegain).
Whenyouhavetocloseoutatrade,sellingintostrengthisalearnedpracticeofprofessionaltraders.Itsimportantto
recognizewhenastockisrunninguprapidlyandmaybeexhaustingitself.Oryoucansellintothefirstsignsofweakness
immediatelyaftersuchapricerunhasbrokendown.
Disasterplan
PlanwhattodoifyourInternetgoesdown,orpowerfails,oryourstockgapsdown,companyinvestigatedbySEC,CEO
embezzledfunds.

DetermineYourCutLossLevelBasedonYourAverageGain

Calculatetheaveragegainfromyouractualtrades.Assumethatatraderisprofitableon50%ofhistrades.Aruleofthumb
couldbetocutyourlossesatalevelofonehalfofyouraveragegain.
Overtimeyouraveragegainwillimproveasyoulearnhowtotrademoreeffectively.Youshouldmonitoryouraveragegainon
aregularbasisandmakeadjustmentstoyourstoplossaccordingly.
Duringmy30yearstradingtensofthousandsofstocks,Ihavebeencorrectonwinningtradesonlyabout50%ofthetimethe
dollaramountsoftheprofitabletradeshavebeenmuchlargerthanthelossesonaverage.
AllowingyourlossonatradetoexceedyouraveragegainiswhatIcallthetraderscardinalsin.

BuildinFailurewithaLowBattingAverageStrategy

Ifatraderhastoberighton70or80%ofhistradesandthatshisedge,whathappensifhesrightonly40or50%ofthetime
duringadifficultperiod?
Theproblemwithrelyingonahighpercentageofprofitabletradesisthatnoadjustmentcanbemadeyoucantcontrolthe
numberofwinsandlosses.Whatyoucancontrolisyourstoplossyoucantightenitupasyougetsqueezedduringdifficult
periods.
Mygoalistomaintainatleasta2:1win/lossratiowithanabsolutemaximumstoplossofnomorethan10%.Iliketokeepmy
risk/rewardratiointactsothatIcanhavearelativelylowbattingaverageandstillnotgetintoserioustrouble.

GetOutImmediatelyWhenYourStopSlips

Soonerorlater,oneofyourstockswilldiveunderyoursell[stop]pricebeforeyoucanreactthisiscalledslippage.Myadvice
istogetoutimmediately.Takewhateverthenextbidpriceis.Suchahardfallingstockissendingawarning.
Sure,therearegoingtobemanytimeswhenyousellastockthatsdownanditcomesrightbackup.Sowhat!Stoploss
protectionisaboutprotectingyourselffromamajorsetbackor,worse,devastation.

HandlingaLosingStreak

Ifyoufindyourselfgettingstoppedoutofyourpositionsoverandover,therecanonlybetwothingswrong:(1)yourstock
selectioncriteriaisflawed,(ii)thegeneralmarketenvironmentishostile.
Leadingstocksoftenbreakdownbeforethegeneralmarketdecline.Ifyoureusingsoundcriteriawithregardtofundamentals
andtimingyourstockpicksshouldworkforyou,butifthemarketisenteringacorrectionorabearmarket,evengoodselection
criteriacanshowpoorresults.Itsnottimetobuyitstimetosellorevenpossiblygoshort.
Scaledownyourexposure,ifitcontinues,cutbackonyourpositionsizesagainandagain.

EaseInWhenComingOutofaBearMarket

Findthetheme
WhenIcomeoutofa100%cashposition,generallyafterabearmarketorintermediatetermcorrection,Irarelyjumpright
inwithbothfeet.Itakeitslowwithmymainfocusonavoidingmajorerrorsandfindingthemarketstheme.
Themescancomeintheformofhowpricesareactingingeneral,industrygroupleadership,overallmarkettone,and
economicandpoliticalinfluencesOnceIfindathemeandestablishmytradingrhythm,thenandonlythendoIstepup
myexposuresignificantlyWhentheopportunitypresentsitselfwiththeleastchanceofloss,Imreadytostrike.Patience
isthekey.
Easein
Asemergingstocksmultiplyonyourwatchlistandthemarkettriestorallyoffitsapparentlows,thetimewillcometotestthe
waterwithrealmoney.
Youshouldstartoffwithpilotbuysbyinitiatingsmallerpositionsthannormaliftheyworkout,largerpositionsshouldbe
addedtotheportfoliosoonthereafterWaitforconfirmationandrequirethatatleastafewtradesworkoutbeforegetting
moreaggressive.Conversely,ifyourtradesarenotworkingasexpected,cutback.
Ifthemarketisindeedhealthy,Ishouldbeexperiencingsuccesswithmytrading.inaddition,youshouldseeadditional
stockssettingupbehindthefirstwaveofemergingleaders.Letyourportfolioguideyou.

ScaleIn,NotAverageDown

Saytheprofessionaldecidestorisk5%oftheircapitalonatrade(mynote:i.e.,positionsizeis5%ofcapital).Thepromay
scaleinwith2%onthefirstbuy,2%onthesecond,andmaybeanadditional1%onthethird.Hethenmightputhisstopat
10%fromtheaveragecostofhis3buys,risking0.5%ofthetotalaccountcapital.

TrailYourStoptoBreakevenWhenProfit=3xRisk

WhenthepriceofastockIownrisesby3xmyrisk,Ialmostalwaysmovemystopuptoatleastbreakeven.SupposeIbuya
stockat$50anddecidethatImwillingtorisk5%onthetrade($47.50stoplossfora$2.50risk).Ifthestockadvancesto
$57.50(3x$2.50),Imovemystoptoatleast$50.
Ifthestockcontinuestorise,Istarttolookforanopportunitytosellonthewayupandnailmyprofit.
Moveyourstopupwhenyourstockrisesby2or3timesyourrisk,especiallyifthatnumberisaboveyourhistoricalaverage
gain.

HandlingDifficultMarketEnvironments

Youmayhaveheardthatinsettingastoplossyoushouldallowmoreroomforvolatilepriceactionyoushouldwidenyour
stopsonthebasisofthevolatilityoftheunderlyingstock.Istronglydisagree.
Mostoften,highvolatilityisexperiencedduringatoughmarketenvironment.Duringdifficultperiods,yourgainswillbesmaller
thannormalandyourpercentageofprofitabletrades(yourbattingaverage)willdefinitelybelowerthanusual,andsoyour
lossesmustbecutshortertocompensate.Itwouldbefairtoassumethatindifficulttradingperiodsyourbattingaverageis
likelytofallbelow50%.Onceyourbattingaveragedropsbelow50%,increasingyourriskproportionatelytocompensatefora
higherexpectedgainbasedonhighervolatilitywilleventuallycauseyoutohitnegativeexpectancythemoreyourbatting
averagedrops,thesoonernegativeexpectancywillbeachieved.
Inaddition,losseswillbelarger,downsidegapswillbemorecommon,andyouwillmostlikelyexperiencegreaterslippage.
Thesmartwaytohandlethisistodothefollowing
Tightenupstoplosses.Ifyounormallycutlossesat7to8%,cutthemto5to6%.
Settleforsmallerprofits.Ifyounormallytakeprofitsof15to20%onaverage,takeprofitsat10to12%.
Ifyouretradingwiththeuseofleverage,getoffmarginimmediately.
Reduceyourexposurewithregardtoyourpositionsizesaswellasyouroverallcapitalcommitment.
Onceyouseeyourbattingaverageandrisk/rewardprofileimprove,youcanstarttoextendyourparametersgraduallyback
tonormallevels.

YouWillNeverAchieveSuperformanceIfYouOverlyDiversify

Dependingonthesizeofyourportfolioandyourrisktolerance,youshouldtypicallyhavebetween4and6stocks,andfor
largeportfoliosmaybeasmanyas10or12stocks.Thisshouldprovidesufficientdiversificationbutnottoomuch.
Youshouldnotholdmorethan20positions,whichwouldrepresenta5%positionsizeiftheywereequallyweighted.
Ifyoureatrue2:1trader,mathematicallyyouroptimalpositionsizeshouldbe25%(fourstocksdividedequally).Asaresult,a
stockthatisabigwinnerwillmakearealcontributiontoyourportfolio.
Concentrateyourcapitalintheverybeststocksarelativelysmallgroupthathaveexcitingthingsgoingon.Watchyour
stockscarefullyandbepreparedtomoveifthingstakeaturnfortheworse.
Inmycareer,IhavehadmanyperiodsinwhichIputmyentireaccountinjustfournames.Thisofcoursecorrespondswith
someofmymostprofitableperiods.

OTHERS

CategorizeYourStocksIntoSixCategories

Marketleaders
#1,#2,or#3insalesandearningsintheirindustryandgainingmarketshare.
EPSgrowthof20%orhigher.
ThesecompaniesgrowsofastthatWallStreetcantvaluethemveryaccurately,leavingthestockinefficientlypricedand
providingabigopportunity.
Onetypeofmarketleadersarecategorykillers,orcompanieswhosebrandandmarketpositionaresostrongthatitwould
bedifficulttocompeteagainstitevenifyouhadunlimitedcapital(e.g.Disney,Walmart,Apple).
Anothertypearecookiecutters,whereafirmproducesasuccessfulformulainonestoreandthenreplicatesitoverand
over.Youwanttoseesamestoresalesincreasingeachquarter.Highsingledigittomoderatedoubledigitsamestore
salesgrowthishighenoughtobeconsideredrobustbutnotsohighthatitsunsustainable(25to30%ormoresamestore
salesgrowthisdefinitelyunsustainableoverthelongterm).Otherkeymetricsincludecomparingsalespersquarefoot,and
salesperdollarofcapitalinvestedperunitwithothercompaniesinthesamebusiness.
Topcompetitors
Atopcompetitormaynotbethesuperiorcompanyinanindustrygroup,rather,itsintherightplaceattherighttime.These
competitorcompaniescanalsoproducehighratesofearningsgrowthandenjoylargescalepriceadvances.The#2
companyinanindustrycaneventuallytakemarketsharefromtheleaderandinsomecasestakeoverthe#1spot.
Alwaystrackthetop2of3stocksinanindustrygroup.
Institutionalfavorites
Maturecompanieswithagoodtrackrecordofconsistentsalesanddividendgrowth.Earningsgrowthisgenerallyinthelow
tomidteens.
Turnaroundsituations
Lookforatleast2quartersofstrongearningsincreasesor1quarterthatisupenoughtomovethetrailing12month
earningspersharetonearoraboveitsoldpeak.
Lookforaccelerationinthegrowthrateinthemostrecentcoupleofquarterscomparedwiththethreeandfiveyeargrowth
rate,whichoftenisnegativeorreflectsveryslowgrowth.
Youwanttoseethestockactingwellinthemarketandthefundamentalscominginstrong.
Cyclicalstocks
CyclicalstockshaveaninverseP/Ecycle,meaningtheygenerallyhaveahighP/Eratiowhentheyarepoisedtorallyanda
lowP/Eneartheendoftheircycle.
Withcyclicalstocks,thetrickistofigureoutwhetherthenextcycleturnisgoingtohappenearlierorlaterthanusual.
Inventoriesandsupplyanddemandareimportantvariablesinanalyzingthedynamicsofcyclicalstocks.
Atthebottomofacyclicalswing,earningsarefalling,dividendsmaybecutoromitted,P/Eishigh,newsisgenerallybad.
Atthetopofacyclicalswing,earningsaremovingup,dividendsarebeingraised,P/Eislow,newsisgenerallygood.
Pastleadersandlaggards
Alaggardisastockthatbelongstothesamegroupasthemarketleaderbuthasinferiorpriceperformanceandinmost
casesinferiorearningsandsalesgrowth.Stayawayfromlaggards.

PlanYourTradesWithoutDistractions

PlanningyourtradesinadvanceallowsyoutoconductresearchwhentherearenodistractionssuchaslevelIIsystemsor
blinkingquotescreens.Iconductmyresearchataroundthesametimeeachevening.Bythetimetheopeningbellringsat
9:30a.m.,Ialreadyknowwhichstocksshowthemostpotentialandatwhatpricelevel.
Watchlistshorthandnotation
UnderlineShowspotential
pbStockissettingupinsuchawaythatIwouldbeinterestedonapullback
AsteriskStockhasformedapivotpoint
CircledAsteriskPivotpointisimmediatelybuyable
CircledReallylikeastock
Tradingscreenorganization
BuyreadyCircled+Asterisks
BuyalertUnderlined
Watchpb+others

Quotes

LesBrown
Youdonthavetobegreattogetstarted,butyouhavetogetstartedtobegreat.
VinceLombardi
Practicedoesnotmakeperfect.Onlyperfectpracticemakesperfect.
MarkWeinstein
Ialsodontlosemuchonmytrades,becauseIwaitfortheexactrightmoment.Mostpeoplewillnotwaitfortheenvironment
totipitselfoff.Theywillwalkintotheforestwhenitisstilldark,whileIwaituntilitgetslight.Althoughthecheetahisthe
fastestanimalintheworldandcancatchanyanimalontheplains,itwillwaituntilitisabsolutelysureitcancatchitsprey.It
mayhideinthebushforaweek,waitingforjusttherightmoment.Itwillwaitforababyantelope,andnotjustanybaby
antelope,butpreferablyonethatisalsosickorlame.Onlythen,whenthereisnochanceitcanloseitsprey,doesitattack.
That,tome,istheepitomeofprofessionaltrading.
JesseLivermore
Letussaythatanewstockhasbeenlistedinthelasttwoorthreeyearsanditshighwas20,oranyotherfigure,andthat
suchapricewasmadetwoorthreeyearsago.Ifsomethingfavorablehappensinconnectionwiththecompany,andthe
stockstartsupward,usuallyitisasafeplaytobuytheminuteittouchesabrandnewhigh.
MarkMinervini
Ivealwaysfeltthatsmartpeoplelearnfromtheirmistakesbutreallysmartpeoplelearnfromotherpeoplesmistakes.

RecommendedBooks

RichardLoveSuperperformanceStocks(Chapter7)
MarcR.ReinganumTheAnatomyofaStockMarketWinner(MarchApril1988issueofFinancialAnalystJournal)
RobertA.LevyTheRelativeStrengthConceptofCommonStockPrice
EdwardS.JensenStockMarketBlueprints(1967)
RichardDonchianVariousarticles
WilliamL.JilerHowChartsCanHelpYouintheStockMarket
JesseLivermoreHowtoTradeinStocks
StanWeinsteinSecretsforProfitinginBullandBearMarkets

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