4 Simple rules to follow this week.
- (1) Only buy contracts with price>50
- (2) Use Trailing Stop Loss of 10 or 20
- (3) Use Limit orders for Profit Taking (1/3 at 20, 1/3 at 40 and 1/3 with TSL
- (4) Don't hold any positions overnight
What to expect from this book?
Answers to some of the toughest and most confusing questions.
- 1. When to hold a short term winner for a longer term gain?
- 2. When to cut your loss even before a stop loss is hit?
- 3. How to establish the optimal position size?
- 4. How and when to buy and sell?
- 5. What to examine during post-trade analysis to improve your weaknesses and build a solid foundation for success?
Who is Mark Minervini?
- 33y of experience and real-life application
- US Investing champion
- Turned a few thousand dollars into a multimillion dollar fortune
- Started out poor with little education
- Struggled with trading for almost a decade and then in 1990 determined to become the best stock trader in the world
- Unconditional persistence and learnt discipline brought him success
- "And I know, even today, if I break my discipline, I could easily go from success to failure."
Can you lose even with right knowledge, hard work and practice?
If you practice the wrong things you will only engrain bad habits and perfect fault mechanics
It is most important to practice the correct methods over and over
Is there a secret to winning?
Success is a choice. Those who choose to win:
- Seek successful role models
- Develop a road map for success
- Accept setbacks as valuable teachers
- They put a plan into action, learn from their results, and make adjustments until they achieve victory
- Champions don't leave greatness to chance
- This book is all about taking ownership of your trading and your life and accepting full responsibility for your results. Without taking 100% responsibility, how can you cultivate a 100% ability to respond effectively
What is the first type of Trader in each one of us?
- (1) The Builder
- Disciplined and process driven
- Focused on procedure and perfecting the method
- Trusts that the results will come if he gets the process right
- Mistakes provide valuable lessons in a continuous feedback loop
- MOTO: That mistake I won't make again
- Ever optimistic, the builder looks forward to the day when results are achieved - because the process is constantly being improved
What is the second type of Trader in each one of us?
- (2) The Wrecking Ball
- Ego-driven, the wrecking ball is fixated on results
- If they don't come right away, he gets discouraged
- If a mistake is made, the wrecking ball beats up on himself or looks for someone or something else to blame
- If a strategy doesn't produce winning results quickly or it goes through a difficult period, the wrecking ball tosses it aside and looks for a new strategy, never really committing to a process
- Wrecking ball rarely takes ownership of the outcome and as a result, never builds anything lasting or wonderful
So which Trader are you?
- You have both the Builder and the Wrecking Ball inside you
- In the end, the one which is fed wins
- Your job is to choose to feed the builder and starve the wrecking ball
- To be mindful of this daily is even more important than a strategy or the mechanics of trading
How are your beliefs influencing your trading?
- The key to winning at anything is having a belief in your own abilities, and aligning your belief system with your actions
- In order to reach your full potential, you need to learn to act in sync with what you believe
- For example, do you believe that you must accept small losses and bigger gains in order to grow in the long run?
- Do you believe you need to take big risks in order to make big gains?
- Whatever strategy you choose, make sure you believe in what you are doing so you can fully commit to it and avoid self-sabotage
What to do if you are unhappy with your trading day?
- If you ever find yourself thinking:
- What is heck is wring with me?
- Why did I just do that when I know I shouldn't?
That is a red flag that you need to get in sync with your belief system. In the long run, your belief system always wins.
Are great Traders born or made?
- Long term research from berlin on Violin players reveals that there were no naturally gifted performers
- The elite had 10000 hours of practice under their belt while the less able had only 4000 hours
- There are no shortcuts, nobody is a natural in life or in trading
- Success in market comes from a concerted effort and a willingness to allow the learning curve to unfold, no matter how long it takes
Is practice enough to make a champion trader? Do you need something else?
It's not just putting in the hours that will make you successful. It's the persistent intention to improve by:
- (1) Examining your results
- (2) Tweaking your approach
- (3) Making incremental progress
This concept is called Deep Practice which implies not just doing the same thing over and over, but using feedback to make adjustments and making practice more meaningful.
How important is defining your strategy?
- Odds are that you won't be good at value investing, growth investing, swing trading and day trading.
- If you try to do them all, you will most likely end up a mediocre jack-of-all-trades
- To reap the benefits of One strategy, you will need focus and undivided attention
- Example - If you are a short term trader, you must recognize that selling a stock for a quick profit only to watch it go on and double in price is of no real concern to you.
- You operate in a particular zone of a stock's price continuum independent of others
- Once you define your style and objectives, it becomes much easier to stick to a plan and attain success.
But I expect so many things from my trading?
- Trick to having everything in life is to go after your goals, one at a time.
- Figure out what you want first, and don't move on to the next thing until you accomplish your first goal.
- Why? If you spread too thin, you won't succeed big at anything and will never experience anything fully.
- Remember, specialists get paid well, while those who know a little about many things make good conversation at parties.
- Mastery requires sacrifices; therefore something must come first. Make a list, prioritize, and pursue accordingly.
- Focus, achieve and then move on to the next big goal.
What is the importance of Taking Action?
- Remember, the longer you put off committing to something, the easier it is to delay it even more, because the closer, you get to a challenge, delay shouts all the louder.
- The counterpunch to delay is Action.
- It's better to do something imperfectly than to do nothing flawlessly.
But I want to stay in my comfort zone?
- Moving outside your comfort zone if the essential step to learn any new skill.
- It doesn't mean taking on big risks. It means you will have to stretch yourself and do things that, at first, may feel unnatural or counter-intuitive
- Potential and possibility reside in the fertile field of the unknown
- As a stock trader, when you strip off what feels natural and learn to do what feels unnatural, you become supernatural
How does growth and expansion feel like?
- As you successfully expand beyond your old limitations, you won't have the desire or need to go back to your previous mode of thinking
- Looking back you will be pleasantly surprised by how much you have grown and matured in your trading
- What had seemed so difficult, even impossible, is now part of your new, expanded comfort zone
- With practice and discipline, this new, expanded level of competency becomes axiomatic to the point of being second nature
- This is how mastery is built, one step at a time
What are the 3 stages of knowledge
- (1) Idea stage
- - Someone tells you something, and you evaluate it against your own opinions
- - You may agree, disagree or don't really know what to do with it
- (2) Belief stage
- - This is when you become convinced that what you have been told is true
- - The belief is stronger than an idea but not the strongest level of knowledge
- (3) Knowing through Personal Experience
- - This is the knowledge you carry within yourself. It is what you know to be true because you've experienced it firsthand
How much time will it take to become a champion trader?
- As you accept and embody these ideas and incorporate them into your trading, they will become a part of your body of knowledge:
- (1) Instinctive
- (2) Automatic
- (3) Unquestionable
Don't get discouraged if you're not getting big results right away. No matter how much knowledge you soak up or how smart you are, you need to put in your time at the university of Wall Street
What is the role of persistence in achieving success?
Persistence is more important than knowledge, and victory comes to those who persist, as long as you are learning from your experiences
- It took me 6 long years to become profitable. Through those challenging years, though, I stuck with my strategy
- I didn't jump from one approach to another as if there were some magic formula out there and the secret was finding it
- I decided on a strategy that made sense to me and then concentrated on improving my ability to execute it
- I stayed the course, remained steadfastly disciplined and stuck to the rules
How would you describe success in the stock market?
- Trading is a challenge that sparks your interest and your curiosity
- It goes far beyond any financial rewards
- It is a lifetime of self-mastery, overcoming ego and fears
- Success come one way: Hard Work and Humility
- In the stock market, those who are not humble are destined to be humbled
How long will it take to change to a positive mindset?
- Change happens in an instant
- Just like a smoker can become an ex-smoker by putting out the last cigarette or an alcoholic can put down a drink and never touch a drop again, so it is with limiting beliefs and behaviors
- You can flip the switch on your dreams and your destiny by taking charge and taking responsibility, starting today
- If you don't love your life, it is because someone else influenced it more than you did
What do I need to become a champion trader?
- You need two things:
- (1) A Trading Plan
- (2) A Well Defined Process
- Every endeavor in life requires a plan before you get started
- Trading is a serious business with real money on the line
- The ease of entry into trading gives people the false impression that trading is easy
Why do I need a plan to become a champion trader?
- "It didn't take me long to realize that I had to come up with a plan for buying stocks
- But more importantly, I needed a plan for dealing with the inherent risk that all stocks carry
- A plan lays the ground rules for your trade - It is the what, why, when and how of trading
- Having a plan won't guarantee success on every trade, but it will help you:
- (1) Manage risk
- (2) Minimize losses
- (3) Nail down profits
- (4) Handle unexpected events with decisive action
Having a plan for every trade will dramatically improve your chances of success over time
What are the key elements of a Trading Plan?
There are 4 key elements:
- (1) An ENTRY mechanism that determines precisely what triggers a buy decision
- (2) What will you do if the trade moves against you or the reason you bought changes?
- (3) How will you lock in your profits
- (4) How will you size your trade and when to reallocate funds?
Is it that simple and obvious? How does a trading plan help in real time?
- A Trading plan helps because it gives you a baseline of expectation.
- That way you know if your trade is working out, or if something has gone wrong
- When you don't have a plan, you are subject to wishing and hoping
- Without a plan, you can only rationalizeOften you will tell yourself to be patient when you should be selling, or you may panic during a natural pullback and then miss out on a huge move
How do I avoid Wishing and Hoping in my trading?
- Defining what you expect to happen ahead of time allows you to judge if your trades are working and delivering On Time and As ExpectedTo use an example, it's the difference between having a schedule and wondering when the next train will pull into the station
- If you take the 7:05 train every morning, but one day it is not there by 7:15 you won't think much of it
- But if the train is not there by 8:30, you know something is really wrong and you should probably come up with an alternative mode of transport
How will defining a schedule help my trading plan?
- Expectations for your stock trade are the "schedule".
- If the profit you are expecting doesn't materialize, you shouldn't just sit there waiting and hoping while better opportunities present themselves
- With a well thought out plan, you will be able to determine if the train is on schedule or if there is a disruption in your timeline that is a reason for concern
What is contingency planning in Trading?
- Your goal as a stock speculator is preparedness, to trade with a few surprises. To do so you need to develop a dependable way to handle virtually every situation that may occur
- Create multiple What If? scenarios and update them as you encounter new situations to build your contingency playbook
- Having events and circumstances thought out in advance is a key to managing risk effectively and building your capital
- Lack of preparation can lead to competing thoughts at the precise time you need to implement instant, unbiased action
What are the elements of a Contingency Plan?
Before I make a trade, I have already worked out responses to meet virtually any conceivable development that may take place
- (1) Where I will get out if the position goes against me
- (2) What the stock must do to be considered for purchase again in the event you get stopped out
- (3) Criteria for selling into strength and nailing down a decent gain
- (4) When to sell into weakness to protect your profit
- (5) How will you handle unexpected events that require swift decisive action
How to plan the Initial Stop Loss?
- Before buying a stock, I establish in advance a maximum stop-loss
- The moment the price hits this level, I exit the position without question
- Once I am out of the position, I can evaluate the situation with a clear head
- Once the position advances, the sell point should be raised to protect your profit with the use of a trailing stop
How to plan for Profit Taking?
- Once you have decent profit, generally a multiple of your stop-loss, you should not allow the position to turn into loss
- This can be done by moving up the SL or using TSL
- You may feel foolish breaking even or taking a small profit on a position that was a bigger gain; however, you will feel even worse if you let a nice profit turn into a loss
- There are two ways to sell for a profit
- (1) Selling into Strength - This is when the stock has already done what you expected or is looking exhausted
- (2) Selling into Weakness - This is when the stock has reversed to a level you want to protect
How do best traders behave?
- The best trades emerge and rally for several ticks on increased volume. This is how you differentiate serious buying from retail activity
- The best trades start to work right away and follow through with ease
- Even trades that don't work right away might turn out to be winners. The key is they bounce back quickly from pullbacks
How to evaluate an ongoing trade?
- Hold Tennis Balls and Sell Eggs
- This concept helps you determine when to hold and when to fold
- After a stock moves, the price at some point will experience a short-term pullback. If the stock is healthy, the pullback will be brief and soon met with buying support which should push the stock to new highs - bouncing back like a tennis ball
- Volume should contract during the pullback and expand towards new highs
- Pullbacks reveal what the stock is really made of
How do big winning stocks behave?
- Follow through price action after a breakout
- More up days than down days and more up weeks than down weeks
- Tennis ball action - resilient recovery after pullbacks
- Strong volume on up days compared to down days
- More closes in the upper half of the daily range
What are the two conflicting emotions every trader goes through and how to resolve them?
- Indecisiveness: Should I buy, Should I sell, Should I hold?
- Regret: I should have bought, I should have sold, I should have held
- This inner conflict stems from not establishing a clear timeline and a solid plan up front
- If you don't have a plan, you will surely experience paralyzing emotions and second guess yourself at key decision-making moments
- A plan helps you see things as they are, not worse out of fear, or better out of greed
Section 2: Why should I approach every trade "Risk First"
- Every morning, look into the mirror and say to yourself, "Saurav, you have the capacity to do serious damage to yourself today."
- By thinking and acting Risk First, you know exactly what you stand to lose if you are wrong
- This in trading is far more important than what you stand to gain if you are right, because if you lose all your chips, the game is over
What tendency causes a trader to ignore risk?
- When most investors find a stock they like, all they think about is buying and how much money they are going to make. They can taste those returns
- This Greed leads to impatience, and too often they jump in before thinking things through
- To achieve superior results and survive the bear markets, you must control risk, every trade, every day by determining the stop loss before entering the trade
- For most traders, it becomes even harder to sell as a loss balloons
- Every huge loss starts as a small one. The only way to protect a trade from turning into a large loss is to accept a small loss before it snowballs out of control
How much risk is too much risk?
- Let us use simple mathematics
- - 5% decline takes a 5.26% gain to get even
- - 10% decline takes a 11% gain to get even
- - 40% decline takes a 67% gain to get even
- - 50% decline takes a 100% gain to get even
- - 90% decline takes a 900% gain to get even
- You should definitely keep your losses within 10% making is easier to come back from
What to do when you feel like extending your stop-loss in a live trade?
- Can you tell when a 10% pullback is the beginning of a 50% decline. You Can't
- You wouldn't have bought it if you were expecting it to decline in the first place
- You should never change your stop loss. Use TSL or SL to cut your losses immediately
- Afterwards, you can examine your trading results and decide to make adjustments for your next trade
- If you goal is big performance, large losses are simply unacceptable and counterproductive!
When to avoid trading a Stock?
- If a stock is highly volatile, with dramatic gyrations up and down, it is going to be difficult to control risk as Stop Loss will be under constant pressure
- A Risk First approach tells you to find another stock or avoid trading
- Example: SPY on a monthly expiry day can be very volatile with choppy action
- A stock may go from Point A to Point B, but the most important question is, are you going to be able to stay onboard