The full title of this book is How to Make Money in Stocks Success Stories: New and Advanced Investors Share Their Winning Secrets by Amy Smith.
This is another book in Investor’s Business Daily’s series of books. This book highlights specific experiences that different people have with the IBD methodology. Most of the content would be familiar to people who already know/use the IBD methodology. Three main things I took away from this book are:
- To lessen damage from choppy markets, gradually increase your portfolio allocation after a follow-through day as the market proves to you that is genuine, do not switch from 0% allocation to 100% allocation.
- You have to prepare to sit through a number of ~25% drawdowns on huge winners.
- Always have re-entry rules to get back in when you are shaken out of your position.
The book also offers some sample daily / weekly routines for using IBD’s set of tools for trading. Having a routine is essential to ensure that you are working on it every day, so that you can be there to catch opportunities when they knock on the door.
For people unfamiliar with IBD, I would recommend reading William O’Neil’s main book How to Make Money in Stocks. For people familiar with IBD, this book is a very quick refresher and highlights a few points which are helpful reminders.
- Start of uptrend
- Indices rally a few days off their lows, with one of the major indices closing the day higher 1.5% or more on bigger volume than the previous day.
- Start of downtrend
- 5 or 6 days of distribution over a 4- to 5-week period. A distribution day is a heavy day of selling that causes an index to close 0.2% lower on volume higher than that of the previous day.
- IBD’s 3 market stages
- Confirmed uptrend
- Uptrend under pressure
- Market in correction
- Cyclical market cycles
- A cyclical bull market lasts on average from 2 to 4 years.
- A cyclical bear market lasts from 3 to 9 months and in rare cases as much as 3 years.
- Secular market cycles
- Secular bear markets last 12 to 18 years.
- Secular bull markets can last from 20 to 30 years.
- Base patterns
- Double bottom
- Breakout from flat base
- Secondary buy points
- Three-weeks-tight pattern where a stock closes 3 weeks in a tight range with less than a 1% difference in closing price during that time.
- 1st or 2nd pullbacks to the 10-week moving average on low volume.
Signs of a Stock Topping
- Greatest weekly price spread: Spread from absolute low to absolute high of the week is wider than any price spread in any week so far.
- High volume break of the 50-day moving average
- Largest daily price run-up since the beginning of the whole move up
- Heaviest daily volume, especially on a high volume reversal day.
- Distribution and stalling: Repeated high volume selling days or heavy daily volume without further upside price progress.
- Increase in number of consecutive down days.
- New highs on low volume.
- Greatest one-day price drop after an extended advance.
- After a long advance, closing below the 10-week moving average and staying below for 8 or 9 consecutive weeks.
Don’t Be Lured to Constantly Play the Market
- Stop looking at 5-minute intraday charts
- Wait until the end of the day to decide whether to buy or hold a stock.
- Use a weekly chart as the primary way to analyze and make decisions.
Set Capital Allocation Thresholds to Handle Choppy Markets
- In 2011, Ed faced a difficult period. He went back and analyzed the entire year, and realized that portfolio concentration was the problem, so he needed a new set of management rules for choppy, difficult markets.
- He made a ‘threshold rule’: if the market issued a follow-through day, he would go in no more than 20% invested, unless the stocks in his portfolio made a gain of 2%, then he could go in a little deeper.
- Even if he was tempted to buy more than he should, having portfolio management rules would keep him out of a choppy market.
Set Re-Entry Rules for Shaken Out Stocks
- In 1995, Ascend Communications, a true market leader, suddenly broke below the 50-day moving average on heavy volume in October. Jim sold his entire position, but by the end of the trading day, Ascend closed back above the 50-day moving average.
- Jim realized that he made a mistake in selling the stock, but he didn’t go back in. The shakeout had rattled him. Ascend went on to rocket higher in the following months.
- After that, Jim made a rule that if he gets shaken out of a position, he must go back into a stock on the same day if the stock retakes the 50-day moving average. This benchmark line is a place where large institutional players will often come in to support a position that they hold, so it is a sign of strength if a stock retakes that line with heavy volume on the same day that it falls below it.
- Always be prepared to buy a stock back if it subsequently turns around and starts to make another move.
Tips on Handling a Big Winner
- Many people might discover a winning stock but end up selling it too soon or make the mistake of not going back into the stock after being shaken out of it. These stocks are the ones that can really change your life if you handle them correctly.
- Be prepared to sit through 4 pullbacks in a year of 20 to 26%
- Jim Roppel’s overall strategy is to hold a stock for a year. He knows that a big winner may have 4 pullbacks to the 50-day line along its massive run. He is mentally prepared for a pullback of 20 to 26% with a truly big winner but notes that you have to literally sit on your hands and stay disciplined as a stock pulls back. He knows that the equity curve in his hedge fund can come down 20% or more, but this is where the professional investor must have the confidence to sit through pullbacks in order to get the big monster moves.
- Many of the market’s biggest winners will shake you out. You have to find a way to get back into them once you have identified them to be the leaders in the current bull market cycle.
- Buy on the daily charts, sell on the weekly
- One way to remove emotional trading is to buy on the daily charts and sell on the weekly.
- The daily action tells you when a stock is breaking out, but the weekly shows the big picture that is valuable in assessing how a stock is acting.
- To capture the significant moves, it’s important not to be shaken out by the day-to-day market gyrations, instead focusing on the intermediate trend. As weekly stock chart helps put this into perspective.
- Entering on gap-ups
- Buyable gap-ups should only be entered in stocks exhibiting strong fundamental strength in an uptrending market. These big gap-up moves in price can make investors nervous, but they are often characteristic of true market leaders.
- A more successful buyable gap-up play occurs in a market leader that has already proven itself but is rocketing higher due to a positive earnings report.
- When large institutional money goes into a stock, it is a good indication that they have faith in the company and its products or services and see the likelihood of success in the future.
- Add at logical points
- Bill has the ability to truly capitalize on the market leader. Once he has a profit cushion with a stock, he will sit with it and add at logical points as the stock rises in price. He spreads his purchases over several weeks and months.
- Never chase a stock
- Wait till it offers an alternative entry, such as another base pattern or a pullback to the 10-week line. And make sure that it continues to outperform other stocks in the market in terms of earnings and sales.
- Have a sell rule that if a stock has a severe break of the 50-day moving average on heavy volume after a long run, then it must be sold.
Track Stocks That Break Out After a Follow-Through Day
- If the market has started on a new uptrend, track the stocks that broke out after the most recent follow-through day. The stocks that break out early and perform the best a few weeks after a new uptrend begins are the ones that may lead the new rally.
- How the breakouts act also helps to determine the health of the rally. If a number of breakouts stall or begin to fall below their pivot points, it may lead to a failed rally attempt.
Perform Post Analysis
- Throughout the year, print daily and weekly charts upon buying or selling a stock.
- Once a year, organize the charts for the previous 12 months based on performance.
- Analyze your largest percent gainers and largest percent losers.
- Study your individual trades and ask yourself if you broke any rules in your trading system.
Be Extremely Flexible
- Mike Webster round-tripped (letting a gain fall back to the purchase price) a big position, letting a large gain evaporate. Bill said, “You always need to be flexible, bending like a tree in the wind. Don’t freeze up. If a stock starts acting poorly, start selling at least some of it, then reassess and sell more if warranted.”
- If Bill makes a mistake, he’ll correct it quickly, but if the stock turns and sets back up, Bill will go back in and buy the stock back, only with slightly more money than the first time around, putting him in the offensive position.
- As an example of Bill’s flexibility, he was very bearish in 1999 before the last and final run that the market made. But when the market issued a follow-through day in September 1999, he totally changed his mind and accepted what the trend was telling him. Bill could also be glowing and excited about a stock but will immediately move on if he’s wrong and not give it another thought.
- You cannot go by what you think or feel. You must see what is actually happening in the market and with leading stocks.
- Basic (20-minutes)
- Read IBD’s Big Picture column.
- Watch Market Wrap video at investors.com/ibdtv
- Follow the stocks in IBD 50 (published Mon and Weds).
- Keep a watch list of stocks nearing a potential buy point (using the IBD 50 mini-charts which show the buy points).
- Check Stocks On the Move to find stocks with institutional participation
- Read The New America to learn about innovative companies
- Use Stock Checkup to research on interested stocks
- Check mini charts in Stock Spotlight
- See how Sector Leaders in the Research Table Review are performing
- Read the Industry Themes article to keep up with leading trends among industry groups.
- Check IBD’s New High List
- Read and study Bill O’Neil’s article How to Find and Own America’s Greatest Opportunities in the Weds edition.
- Basic (1-hour)
- Go through IBD 50 in detail, read more about the companies
- Watch Daily Stock Analysis videos
- Update your watch list
- Keep a ready list of stocks nearing a potential buy point that you have researched and are prepared to buy if they break out on volume that is at least 40% above average.
- Consider entering trade triggers with broker.
- Keep another list of stocks that aren’t close to a breakout but are building a base or consolidating gains, particularly if the stock has already proven itself to be a market leader.
- Check Your Weekly Review (in Friday edition) mini charts for stocks approaching a potential buy point.
- Listen to IBD’s How to Make Money in Stocks radio show
- Study the 100 charts that are in the front of How to Make Money in Stocks to learn more about base patterns and life cycles of the big market winners.
- Write in a journal your trades for the week or thoughts about the general market. This will help as you do a year-end post analysis.