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August/September 2015 www.tradersonline-mag.com

subscribe August/September 2015 www.tradersonline-mag.com Insights from Trading Legend Mark Minervini How to Trade

Insights from

Trading Legend Mark Minervini

How to Trade Like a Champion Market Wizard
How to
Trade
Like a
Champion Market Wizard

cover story

www.tradersonline-mag.com 08.2015

How to trade Like a champion Market Wizard

Insights from trading Legend Mark Minervini

Investing styles may differ among successful market players, but without exception, winning stock traders share certain key traits required for success. Fall short in those qualities and you will surely part ways with your money. The good news is that you do not have to be born with them. Along with learning effective trading tactics, you can develop the mindset and emotional discipline needed to win big in the stock market. Two things are required:

a desire to succeed and a winning strategy. There is a big difference between making a decent return in the stock

market and achieving super performance, and that difference can be life changing. Whether you are an accountant,

a school teacher, a doctor, a lawyer, a plumber, or even broke and unemployed as the author was when he started – you can attain super performance.

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F1) strong Breakout trade

F1) strong Breakout trade The stock of Repligen (RGEN) broke out dynamically in March 2015. Moving

The stock of Repligen (RGEN) broke out dynamically in March 2015. Moving the stop to breakeven protects your principal and keeps you with the longer term trend.

Source: www.tradesignalonline.com

gains like the market’s money instead of their money, and in due time the market takes it back. Let us say someone buys a stock at $20 a share. It climbs to $27. Then the investor decides he can “give it room” because he has a seven point cushion. Wrong! Once a stock moves up a decent amount from its purchase price, Mark Minervini usually gives it less room on the downside. He goes into a profit protection mode. At the very least, he protects his breakeven point. He is certainly not going to let a good gain turn into a loss. At the end of each trading session, when you review your portfolio, ask yourself this: Am I bullish on this position today? If not, why am I holding it? Does your original reason for going long remain valid? End every trading day with a frank appraisal of all your positions. We are not suggesting that you not allow a stock to go through a normal reaction or pullback in price if you believe the stock can go much higher. Of course, you should give stocks some room to fluctuate, but that leeway has little to do with your past gain. Evaluate your stocks on the basis of the return you expect from them in the future versus what you are risking. Each day, a stock must justify your confidence in holding it for a greater profit.

Avoid the Big Errors

Recently, the author had a chance to speak with Itzhak Ben-David, coauthor of the study “Are Investors Really

» Consistency Wins the Race

People buy stocks in hopes of making money and increasing their wealth. They dream of the great returns that their carefully chosen investments will yield in the future. Before investing your hard-earned cash, however, you had better think about how you will avoid losing it. If there is one thing Mark Minervini has learned over the years, it is that risk management is the most important building block for achieving consistent success in the stock market. Notice that we said “consistent.” Anyone can have short term success by being in the right place at the right time, but

consistency is what differentiates the pros from the amateurs, the timeless legends from the one hit wonders. During his career, the author has witnessed many people make millions of dollars during good times, only to give it all back and even go broke. We are going to tell you how to avoid that fate.

It is Your Money, but Only as Long as You Protect it

To achieve consistent profitability, you must protect your profits and principal. As a matter of fact, Mr Minervini does not differentiate between the two. A big mistake many traders make is to consider trading profits as house money, acting as if that money somehow is less their own to lose than their original starting capital is. If you have fallen into this mental habit, you need to change your perception immediately to achieve superperformance. Let us say the author makes $5,000 on Monday. He does not consider himself $5,000 “ahead of the game,” free to risk that amount shooting for the moon. The account simply has a new starting balance, subject to the same set of rules as before. Once he makes a profit, that money belongs to him. Yesterday’s profit is part of today’s principal. Do not fall into the faulty reasoning of amateur gamblers. Through consistent play and conservative wagering, a player picks up $1,500 at the blackjack table. Then he starts to make big, reckless bets. In his eyes, he now is playing with house money. This happens all the time in the stock market. Amateur investors treat their

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www.tradersonline-mag.com 08.2015

F2) Booking a small Loss

F2) Booking a small Loss In November 2014, Mark Minervini bought a questionable “V”-shaped breakout at

In November 2014, Mark Minervini bought a questionable “V”-shaped breakout at Alcoa (AA). As the stock did not confirm the breakout but started to go lower, the mistake was recognized and the position closed for a small loss.

Source: www.tradesignalonline.com

Reluctant to Realise Their Losses? Trading Responses to Past Returns and the Disposition Effect.” The tendency to sell winners too soon and to keep losers too long has been called the disposition effect by economists. Mr Ben-David and David Hirshleifer studied stock transactions from more than 77,000 accounts at a large discount broker from 1990 through 1996 and did a variety of analyses that had never been done before. They examined when investors bought individual stocks, when they sold them, and how much they earned or lost with each sale. They also examined when investors were more likely to buy additional shares of a stock they had previously purchased. Their results were published in the August 2012 issue of the Review of Financial Studies. The study highlights several interesting conclusions:

• Investors are more likely to allow a stock to reach a large loss than they are to allow a stock to attain a large gain; they hold losers too long and sell winners too quickly.

• The probability of buying additional shares is greater for shares that have lost value than it is for shares that have gained value; investors may readily double down on their bets when stocks decline in value.

• Investors are more likely to take a small gain than a small loss.

Most investors are simply too slow in closing out losing positions. As a result, they hold on until they cannot take the pain anymore, and that eats up precious capital and valuable time. To be successful, you must keep in mind that the only way you can continue to operate is to protect your account from a major setback or, worse, devastation. Avoiding large losses is the single most important factor for winning big as a speculator. You cannot control how much a stock rises, but in most cases, whether you take a small loss or a big loss is entirely your choice. There is one thing we can guarantee: if you cannot learn to accept small losses, sooner or later you will take big losses. It is inevitable.

To master the craft of speculation, you must face your destructive capacity; once you understand and acknowledge this capacity, you can control your destiny and achieve consistency. You should focus a significant amount of time and effort on learning how to lose the smallest amount possible when you are wrong. You must learn to avoid the big errors.

Practice Does Not Make Perfect

Mark Minervini knows people who have managed money on Wall Street for decades yet have only mediocre results to show for it. You would think that after all those years of practice their performance would be stellar or at least would improve over time. Not necessarily. Practice does not make perfect. In fact, practice can make performance worse if you are practicing the wrong things. When you repeat something over and over, your brain strengthens the neural pathways that reinforce the action. The problem is that these pathways will be reinforced for incorrect actions as well as correct actions. Any pattern of action repeated continuously will eventually become habit. Therefore, practice does not make perfect; practice only makes habitual behaviour. In other words, the fact that you have been doing something for a while does not mean you are guaranteed success. It could be that you are just reinforcing bad habits. The author subscribes to the advice of legendary

32

cover story

T1) Loss versus Gain Asymmetry

Loss

Gain to Break Even

5%

5.26%

10%

11%

20%

25%

30%

43%

40%

67%

50%

100%

60%

150%

70%

233%

80%

400%

90%

900%

The higher your drawdown, the more difficult it will be to make it back. That is a mathematical reality you should always keep in mind.

Source: www.minervini.com

Psychologist Henry L Roediger III, who is the principal researcher for the department of psychology at Washington University in St. Louis, conducted an experiment in which students were divided into two groups to study a natural history text. Group A studied the text for four sessions. Group B studied only once but was tested on the subject three times. A week later the two groups were tested, and group B scored 50 per cent higher than group A. This

football coach Vince Lombardi. As he said, “Practice does not make perfect. Only perfect practice makes perfect. In the stock market, practicing wrongly will bring you the occasional success even if you are using flawed principles. After all, you could throw darts at a list of stocks and hit a winner once in a while, but you will not generate consistent returns and eventually you will lose. The reason most investors practice incorrectly is that they refuse to objectively analyse their results to discover where their approach is going wrong. They try to forget the losses and keep doing what they have always done. The proliferation of cheap brokerage commissions, Internet trading, and web-based stock market data may have provided everyone with the same technology, but it did not grant investors an equal ability to use those resources. Just as picking up a five iron does not make you Tiger Woods, opening a brokerage account and sitting in front of a computer screen does not make you Peter Lynch or Warren Buffett. That is something you must work for, and it takes time and practice. What is important is that you learn how to practice correctly.

Avoid Paper Trading

As new investors learn the ropes, often they engage in

paper trading to practice before putting real money at risk. Although this sounds reasonable, Mr Minervini is not a fan of paper trading, and he does not recommend doing it any longer than absolutely necessary until you have some

money to invest. Paper trading is the wrong type of practice. It is like preparing for a professional boxing match by only shadow boxing; you will not know what it is like to get hit until you enter the ring with a real opponent. Paper trading does little to prepare you for when you are trading for real and the market delivers a real punch. Because you are not used to feeling the emotional as well as the financial pressure, it is unlikely that you will make the same decisions you did in your practice sessions. Although paper trading may help you learn your way around the market, it can also create a false sense of security and impede your performance and learning process.

F3) textbook sePA© setup

F3) textbook sePA© setup This buy setup in late February 2015 in Amphastar Pharmaceuticals (AMPH) was

This buy setup in late February 2015 in Amphastar Pharmaceuticals (AMPH) was emerging from a classic volatility contraction pattern.

Source: www.tradesignalonline.com

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cover story

www.tradersonline-mag.com 08.2015

cover story www.tradersonline-mag.com 08.2015 You should trade with real money as soon as possible. demonstrates the

You should trade with real money as soon as possible.

You should trade with real money as soon as possible. demonstrates the power of actually doing

demonstrates the power of actually doing the thing

you are trying to accomplish versus preparing for it in

simulation.

If you are just starting out, you should trade with

real money as soon as possible. If you are a novice

trader, a good way to gain experience is to trade with an

amount of money that is small enough to lose without

changing your life but large enough that losses are at

least somewhat painful.

Do not fool yourself into a false sense of reality. Get

accustomed to trading for real because that is what you

are going to have to do to make real money.

be to become a specialist in your approach to the

market.

Although strategy is important, it is not as critical

as knowledge and the discipline to apply and adhere to

your rules. A trader who really knows the strengths and

weaknesses of his or her strategy can do significantly

better than someone who knows only a little about a

superior strategy. Of course, the ideal situation would be

to know a lot about a great strategy. That should be your

ultimate goal.

Invest in Yourself First

When the author began trading in the early 1980s, he

endured a six-year period when he did not make any

money in stocks. In fact, he had a net loss. It was not

until 1989 that he began to achieve meaningful success.

What kept him going? Unconditional persistence! An

investment in knowledge, which takes time to acquire, is

an investment in yourself, but it requires persistence.

When you make an unshakable commitment to a

way of life, you put yourself way ahead of most others

in the race for success. Why? Because most people

Commit to an Approach

You do not need a PhD in math or physics to be successful

in the stock market, just the right knowledge, a good work

ethic, and discipline. The author’s SEPA® methodology

was developed after decades of searching, testing, and

going back to the drawing board countless times to

uncover what actually works.

You, too, will go through your own trial and error

period: window shopping and trying various concepts

e, have have a a natural natural tendency tendency to to overestimate overestimate what what
e,
have have a a natural natural tendency tendency to to overestimate overestimate what what they they can can
t,
e.
d

and approaches to the stock market, whether value,

growth, fundamental, technical, or some combination.

In the end, to succeed, you will need to settle on n

an approach that makes sense to you. Most important,

A

you must commit to perfecting and refining your r

understanding of that methodology and its execution.

stock trading strategy is like a marriage; if you are e

not faithful, you probably will not have a good outcome.

It takes time and dedication, but your objective should

Bibliography Title: Trade Like a Stock Market Wizard Subtitle: How to Achieve Super Performance in
Bibliography
Title: Trade Like a Stock Market Wizard
Subtitle: How to Achieve Super Performance in Stocks
in Any Market
Author: Mark Minervini
Pages: 352 pages
Publisher: McGraw-Hill (April 2013)
Price: $ 27.00 Hardcover, $ 27.00 Ebook
ISBN: 978-0-07180-722-7

34

Pages: 352 pages Publisher: McGraw-Hill (April 2013) Price: $ 27.00 Hardcover, $ 27.00 Ebook ISBN: 978-0-07180-722-7
Pages: 352 pages Publisher: McGraw-Hill (April 2013) Price: $ 27.00 Hardcover, $ 27.00 Ebook ISBN: 978-0-07180-722-7

cover story

cover story Many of life’s failures are people who did not realise how close they were

Many of life’s failures are people who did not realise how close they were to success when they gave up.

Thomas Edison

close they were to success when they gave up. Thomas Edison achieve in the short run

achieve in the short run and underestimate what they can accomplish over the long haul. They think they have made a commitment, but when they run into difficulty, they lose steam or quit. Most people get interested in trading but few make a real 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. Getting interested will get you started, but commitment gets you to the finish line. The first and best investment you can make is an investment in yourself, a commitment to do what it takes and to persist. Persistence is more important than knowledge. You must persevere if you wish to succeed in anything. Knowledge and skill can be acquired through study and practice, but nothing great comes to those who quit.

Expect Some Rotten Days

The key to success is to become a successful thinker and then act on those thoughts. That does not mean that all your ideas and actions will always produce the desired results. At times you will feel that success is unattainable. You may even feel like giving up. The author knows. He has been there. Along the way he had days when he felt so demoralised by his unsatisfactory results that he almost threw in the towel and gave up. However, Mark Minervini knew the power of persistence. Then, after more than a decade of trial and error, he was making more money in a single week than he dreamed of making in a year. He experienced what the English poet and playwright Robert Browning meant when he wrote, “A minute’s success pays the failure of years.” Remember, if you choose not to take risks, to play it safe, you will never know what it feels like to accomplish your dreams. Go boldly after what you want and expect some setbacks, some disappointments, and some rotten days. Embrace them all as a valuable part of the process and learn to say, “Thank you teacher.” Be happy, feel appreciative, and celebrate when you win. Do not look back with regrets at failures. The past

cannot be changed, only learned from. Most important, never let rotten days make you give up.

Conclusion

To realise profits from investing in stocks, you must make three correct decisions: what to buy, when to buy, and when to sell. Not all of your decisions will turn out to be correct, but they can be intelligent. It is true that the market is brutal to most of the people who challenge it. But so is Mount Everest, and that should not – and does not – stop people from trying to reach the top. What is expected of a mountain or a market is only that it has no favourites – that it treats all challengers as equals. Trading can be an intellectual stimulation, as well as a way to make money. Played well, it demands skills of the highest order, and skills the trader must work very hard to acquire. A well-conceived and executed transaction is a thing of beauty, to be experienced, enjoyed, and remembered. It should have an essence transcending monetary reward. The stock market provides the greatest opportunity on earth for financial reward. It also teaches great lessons to those who win and those who lose, an education that goes well beyond trading and investing. Without a doubt, the stock market gives you incredible exhilaration when you win and deep humility when you lose. It is the greatest game on earth. «

Excerpts taken from Trade Like a Stock Market Wizard:

How to Achieve Superperformance in Stocks in any Market, Copyright 2013 Mark Minervini – published by McGraw Hill.

Mark Minervini Mark Minervini is one of America’s most successful stock s investors. Starting with
Mark Minervini
Mark Minervini is one of America’s most successful
stock s investors. Starting with only a few thousand
dollars, d he turned his personal trading account into
millions. Mark educates traders about his trading
methodology through Minervini Private Access, a
platform p that allows users the unique experience of
trading t side by side with him in real time.
www.minervini.com

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