After reading Mark Minervini’s book (see review here), I wanted to learn more and started going through his interviews here, audio interviews, a couple of YouTube videos, etc. There isn’t much more on top of what he has in this book. The main takeaway I got was clarification on how he takes profits for winning positions. It’s more a swing trading style rather than a trend-following style that tries to capture the bulk of a long trend.
Some notes below
On Characteristics of Winning Stocks Over the Last 50 Years
- 95% had less than 25 million shares outstanding.
- 95% had a new product, service or some kind of improvement in their industry.
- 95% showed earnings acceleration. 86% showed earnings increases in the most recent reported quarter. 76% of those were up over 10% and 70% were up over 20%.
- More than 99% traded above their 200-day moving average.
- More than 96% were above their 10-week moving average before they made their big move.
On Stop Placement
- If I see a technical point at which the trade obviously sours, I use that level as my stop, providing that it is at a level of acceptable risk mathematically.
- If there is no technical out, I simply use a percentage stop based on expected gain.
- My losing trades average about 3 to 4% during good markets and 5 to 6% during difficult market environments. My absolute “uncle point” is 10%.
On Managing an Open Position
- Stock trades higher
- Once I am at a decent profit, often I will nail down the profit and ring the cash register. I am mainly concerned with making a multiple of what I risked and trying to extend my historical average gain per trade.
- I am not concerned with worrying about the stock going higher after I sell it. I am more concerned with making more money than risked and doing it repeatedly…. I do not really concern myself too much with leaving money on the table. Trading is about making more than you lose and doing it over and over again. As a general rule of thumb, if the stock price trades up to my average gain at a multiple of my risk, I rarely let the price turn into a loss.
- It is much easier to find 4 or 5 names that go up 20% than it is to find a stock that doubles. In order to achieve a big performance number, I go for rapid compounding of relatively smaller gains.
- I don’t let my winners run consistently. I don’t consistently have big winners, and you don’t have to…. You have to figure out what your game is. If you’re looking to have big winners offset losses, then well you’re going to have to give up some of those 10 or 15% profits. However if you are looking to have a higher volume of smaller winners, well then you can give up that bigger move and still accomplish that same result or maybe more.
- I’m going to take a look to see where am I in relation to what I risked, where am I in relation to what I generally return on average, my own personal bell curve, which encompasses everything, it encompasses my emotions, it encompasses my strategy, it’s what I produce. If I’m at a large multiple of that, I’m going to protect that. I might trail a stop below it to protect at least the majority of it, I’m certainly not going to let it turn into a loss. If it happens to keep me in and just turn into a big winner, well fine.
- Stock trades sideways
- Sell on a time stop.
- Stock trades lower
- Sell if it hits stop loss.
On Holding Period
- On average, maybe 20 trading days…. My longer-term trades are generally 2 to 3 quarters.
- During the beginning of a new bull market, I would be more inclined to hold for the long-term and build “core” positions. I often accomplish that by trading out of a portion of the trade at a profit (generally half the position) and then moving my stop to around breakeven on the remaining half.
On Position Sizing and Diversification
- To help protect against taking a big hit you should not put more than 25% of your capital in any one position.
- 8 or 10 positions provide enough diversification, if you cut and limit your losses on the stocks that move against you. Certainly you do not need more than 15 to 20 names even in good times.
- I might carry 12 positions, maybe more if whole bunch of the best names are really thin. I’m going to try to plow in as much money as I possibly can in the absolute best situations. Hopefully I can get all of my money in 4 stocks cash and 8 stocks margin.
- Risk is 1 to 2% of equity per trade
- I use a 20-day, 50-day, 150-day, and a 200-day moving average for smoothing.
On Leaders Topping
- When a leading stock tops, there is a 50% chance that it will go down 80%, and there is a 80% chance that it will go down 50%.
- Once you are in a high-growth name, you don’t want to be around when the stock tops, and they might top 6 to 12 months before the market puts in a top.
On Market Review
- Minervini did a quick market review in an interview withHowardLindzon (StockTwits). In the review, he looked at
- Distribution / accumulation days in the NASDAQ
- RSI(2) on NASDAQ (30/70 thresholds)
- NASDAQ in relation to 10-week MA
- 4-week MA of Bullish Advisors / (Bullish + Bearish Advisors)
- Put vs Calls trading volume
- IPO activity (total number of IPOs and value)
- 10-year yield chart aligned with S&P 500
- Unemployment rate aligned with S&P 500
- Industrial Production Index ($$IIPI) overlaid with S&P 500
- Y/Y change of Real GDP: above 6% is bad for the market
- Y/Y change of four quarter S&P 500 earnings: above 20% market stagnates, below -25% market plunges