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Learning from a Market Wizard: Swinging Stocks in the Style of Mark Minervini


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Learning from a Market Wizard: Swinging Stocks in the Style of Mark Minervini

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 mtzimmer1 
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While not specific to futures trading, I wanted to start this journal on futures.io because it is THE best online trading forum!

There are many terms used to describe the broad style of trading in which I am currently engaged - trend following, momentum, breakout, and growth are but a few of the more popular titles. Regardless of verbiage the objective remains the same: participate in trends that are already underway in an effort to catch the 'meat of the move.' The fundamental underlying belief is that trends are more likely to continue than they are to reverse.

A 2014 study by Capital Fund Management found trend following to be a "genuine market anomaly" to the strong correlation observed between "risk premium" and tail-risk skewness. In other words, over the long run we would expect 'riskier' assets or trading strategies in this case to yield higher net returns. Trend following was found to have unusually high sharpe ratios in conjunction with negative skew.


link to study: https://www.cfm.fr//insights/risk-premia-asymmetric-tail-risks-and-excess-returns/

It has been the conclusion of my own research that a high percentage of traders/investors who have achieved exceptional performance have done so utilizing a strategy that is trend following in nature. Moreover trend traders have found success since the inception of stock markets - from Jesse Livermore in the early 1900's to Darvas in the middle of the century to the current 2020 US Investing Championship contestants the strategy has not yet fallen out of favor. Such a long track record and many variations of a central theme suggests to me that trend following exploits a permanent characteristic of the markets.

The particular style of trading that I will be journaling about is closely resemblant to the strategy outlined by Mark Minervini in his books. In short I will be looking to buy strong stocks as they break out of properly formed bases. Let's break this down.

A strong stock is one that has outperformed both the index and its sector during the most recent months. Typically these will be exciting companies offering a new product or service. Sometimes they are recent IPO's while other times they are well-established companies with a new and innovative idea. In the futures world, there are many stories of great fortunes being built trading persistent trends in commodities.

A properly formed base, as defined by Mark Minervini, must have a few characteristics. To qualify as a VCP (volatility contraction pivot) each successive pullback in price must be smaller in magnitude from high to low than the previous one. Volume should trend lower from the left to the right side of the base suggesting that less and less supply is coming to market. While not essential, it is preferable to see the days with the lowest volume and narrowest ranges occur during the final contraction before the buy point. In short, we want to see a stock quiet down before breaking out.

Here is an excerpt from Mark Minervini's book that explains VCP's succinctly.



The expectation here is that, after undergoing the basing process, a strong stock is likely to continue its ascent.

Risk management is integral to this and every trading approach. I set my stops at the low of the final contraction - a location that will only get hit if the stock fails to properly break out.

In 2021 I am competing in the US Investing Championship and this strategy is an integral component in my approach to the competition. I am coming into this year with no open positions and intend to document every new trade in this journal.

In 2020 I yielded 17% between September, when I began trading this system live, and the end of the year.

Here's to an epic New Year!

-Zimmer

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 mtzimmer1 
Recovering Method Hopper
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Resources:

Books:
"How I Made $2,000,000 in the Stock Market" by Nicolas Darvas
"Trade Like a Stock Market Wizard: How to Achieve Super Performance in Stocks in Any Market" by Mark Minervini
"Think and Trade Like a Champion: The Secrets, Rules and Blunt Truths of a Stock Market Wizard" by Mark Minervini
"How to Make Money in Stocks: A Winning System in Good Times Or Bad" by William O'Neil
"Unholy Grails: A New Road to Wealth" by Nick Radge

YouTube:
IBD Podcasts by Investors Business Daily
Market Chat by Richard Moglen
All of Mark Minervini's videos

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 trendisyourfriend 
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What is the average frequency of trade opportunities with this system? And average time in market?

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 mtzimmer1 
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trendisyourfriend View Post
What is the average frequency of trade opportunities with this system? And average time in market?

Over the past four months I've opened 90 trades for an average of ~1 buy per day. Number of trade opportunities depends greatly on market conditions as setups will be plentiful during bull markets and scarce during bear markets.

My average trade duration has been 17 calendar days so far.

-Zimmer

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 Schnook 
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I'm looking forward to this journal, in no small part due to the fact that I've also been working on some breakout ideas over the past several months, and, like you, have had some encouraging results applying my concepts to individual stocks on daily (as opposed to intraday) timeframes. That said, I do feel that broader market conditions have been extremely supportive of trend-following and breakout strategies in general over the past several months, and I worry that I won't be able to achieve the same results if and when market conditions invariably change. This is something I'll clearly need to work on.

Either way I wish you great success, and hope to maybe pick up a few good pearls by reading your journal. In the meantime perhaps I'll read some of Minervini's published work as well. I've been following him on twitter for a while and like what I've seen so far.

May I ask how you're screening your stocks? I've been tinkering around with finviz.com but ideally would like to create my own custom technical studies, which I don't believe I can do on that platform.

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 mtzimmer1 
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Schnook View Post
I'm looking forward to this journal, in no small part due to the fact that I've also been working on some breakout ideas over the past several months, and, like you, have had some encouraging results applying my concepts to individual stocks on daily (as opposed to intraday) timeframes. That said, I do feel that broader market conditions have been extremely supportive of trend-following and breakout strategies in general over the past several months, and I worry that I won't be able to achieve the same results if and when market conditions invariably change. This is something I'll clearly need to work on.

Either way I wish you great success, and hope to maybe pick up a few good pearls by reading your journal. In the meantime perhaps I'll read some of Minervini's published work as well. I've been following him on twitter for a while and like what I've seen so far.

May I ask how you're screening your stocks? I've been tinkering around with finviz.com but ideally would like to create my own custom technical studies, which I don't believe I can do on that platform.

Schnook, it is a pleasure to read and respond to your comment!

Recently I've been sorting my watchlists by length of time in days since the most recent high from longest to shortest. In doing so I start by looking at the stocks with the most mature bases. I find stocks from two primary sources: 1) colleagues, and 2) reviewing the new 52 week highs list every day. In order to add a stock to my watchlist the company needs to either have solid sales/earnings growth, or have an innovative product or service that I believe to have great disruptive potential. Companies that satisfy both criteria are optimal!

Cheers,
-Zimmer

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 mtzimmer1 
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Bought NVDA @ 539.465, Stop 510.52


NVDA Daily

The solid green line was the pivot level I originally identified. In a closer look last night I realized that the more recent high marked with dashed green and labeled 'Pocket Pivot' may be buyable as well if volume surged as price traded through that level.

NVDA Intraday

Price ripped through the 'Pocket Pivot' level (labeled 1) on elevated volume but by the time the alert went off and I calculated my share size price had already advanced. I've learned it is best to exercise restraint and not chase entries because doing so opens the door to trade plan deviation.

As price traded through the originally marked pivot level (labeled 2) on increased volume I initiated a position.

Open Positions:
NVDA

-Zimmer

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 mtzimmer1 
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Bought OZON today. Dominant e-commerce company in Russia with impressive growth figures. Clean VCP setup on the chart finalized by the inside day pocket pivot that formed yesterday.

OZON Daily


Open Positions:
NVDA
OZON

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 mtzimmer1 
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Stopped out of NVDA.

Bought LPRO @ 34.7399, Stop 32.76


1.6 LPRO Daily


1.6 LPRO Intraday


I love everything about this LPRO buy. IPO'd less than a year ago. Disruptive technology. Relative strength. VCP base pattern. Huge volume surge intraday as price cleared the pivot.

Open Positions:
OZON
LPRO

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 mtzimmer1 
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Bought KSS @ 42.20, Stop 38.64
Bought LMND @ 126.52, Stop 117.99


1.7 KSS Daily

$KSS is perhaps an unpopular pick for this style of trading but I can't argue with the relative strength of the past few months. This is very much a play on reopening, stimulus, and continued growth in new construction and existing home sales. Technically a well formed HTF/VCP.

1.7 LMND Daily

$LMND: Recent IPO. Disruptive Technology that has only scratched the surface of addressable market. Meets the High Tight Flag/Power Play criteria + clear VCP pattern.

1.7 LMND Intraday

I see the final contraction as the time period from 12:45-14:52 yesterday which explains the stop placement.

LMND hit my 2R target today and I took half off. Always nice to have a trade take off right out of the gate.

Open Positions:
OZON
LPRO
KSS
LMND

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