Market Chat with Shahid Saleem & Richard Moglen Mark Minervini: • No Big Losses • No Forced Trades • I am my biggest enemy in trading My Background • Born in Pakistan & did BS Petroleum Engineering there • I did MSc Petroleum Engineering from University of Oklahoma, Norman USA, 1990 • Always among the top in Oil Industry • Famous for college football : Sooners • Started work with Schlumberger in Pakistan =>> top Service company in Oil Ind • Worked for ENI • Moved to UK in 2001: Joined Talisman in Aberdeen: Canadian Oil Company • Worked for Canadian Natural Resources (CNR) an excellent company which expanded phenomenally from 1989 to 2007 • Worked as Exploitation Manager Northern North Sea • Decided to stay technical • Became Consultant for Centrica • Later worked as Consultant for Sasol in London Office • My contract with them was not extended in May 2020 • Started full time trading in July 2020 • As salaries in Oil Industry are high and as Consultant even higher =>> not easy to leave job My Investing Career – How I started • I started trading in 2007 =>> the worst time just before market crash in 2008 • Started reading William O’Neil =>> How to make money in Stocks • Got membership of IBD & Market Smith • Bought their Courses and learned CANSLIM • It was an eye opener • Start was pretty good =>> while market was pulling initially • Transport (rails) & Oil were doing good • Identified them and made reasonable • Following IBD, I was out of the market when the bear market started • Market bottomed in March 2009 =>> I was positive since I started =>> that was great • William O’Neil also thought that market had bottomed • Bought multi-baggers like AAPL, PCLN, Googl etc 2008-9 Bear Market- Nasdaq Market Sentiments 2008-9 Bear Market- PCLN- now BKNG Power of Relative Strength during Bear Market 2008-9 Bear Market- PCLN- now BKNG -M • Would have not held that long • Shares holding very well in a Bear Market could be multi baggers 2008-9 Bear Market- AAPL Power of Relative Strength during Bear Market 2008-9 Bear Market- AAPL- (M) AMZN- 2009 Power of Relative Strength during Bear Market My Biggest Blunder • I was watching CNBC after the market bottomed in March 2009 • One analyst predicted that market is going for another major leg down again • I remembered, I watched him before market crash =>> when he very rightly predicted market crash • I thought he is a big guru and know it all as he was being appreciated for his predictions • I avoided bear market crash using IDB & in fact made reasonable money in rallies • I entered the market and bought shares and doing well • I joined his service based on waves • He started telling us to short the market • I sold my positions & went short =>> he will keep on changing waves • Lost what I made & more • In the mean while the stocks which I sold were galloping & I was so dejected • You start making blunders once you are angry • Remain nimble & listen to the market & not opinions • There will always be people who may predict by luck once or twice No One can predict market direction: Don’t listen to them My Story • I was a fulltime employee • Family lived in Aberdeen in Scotland & I was working as a consultant since June 2014 in London • Used to travel every weekend =>> flights • Not easy to trade also because of time difference too • Market opens at 2:30 pm UK time and closes at 9 pm • Difficult • Was about to give up and planned to invest in funds….. How I became a consistent Investor - Mark • I came across Mark Minervini & started following his tweets • He was also talking about his books and Master Trader Program (MTP) • He also talked about his Mark Private Access (MPA) • He told that he is not very educated but a highly successful investor • If he can do it why can’t I? • Initially I thought as marketing strategy • My results were midcore at best that time • Had some good years but gave back a lot of gains too • Then I started reading his tweets & I can see the wisdom behind it as it was like O’Neil • I bought his books & was very impressed • Everything changed once I joined Mark MPA on 17th June 2017 • Initially I signed for a month but then Bob Wiseman called me & explained that it will take some time for me to understand it =>> Yearly Membership • I wish I had joined MPA earlier How I became a consistent Investor • People spent a lot of money going to Uni, but most investors are not willing to spent money to learn trading correctly • Reading few books may help but not for me • I had many Serious trading issues & was not able to overcome despite knowing them and even writing them down • After I joined MPA, I had put a lot of effort to learn • Read his books several times, listened to his older lectures on MPA platform: again & again • Read a chapter & then listen to his lectures on specific topics • Making notes in Power Point =>> short book • Pasted examples of different bases & rules from his books & lectures • Marked on charts all his buys and sells : why & when he is buying, selling, market condition • Understanding Market theme/direction • I wanted to learn not just copy him =>> that was the fun • Trading side by side with him helped me • To over come my fear • Calmed me down How Mark Influenced My Trading Trading side by side with Mark helped me a lot along with his weekly & other lectures =>> best teacher one can have • Psychology: Emotions, sticking to rules =>> especially in volatile markets (fear & greed), stay positive • Risk Management is the key: Low risk entry, SL, Position sizing, progressive exposure etc. • Keep losses small =>> avoid big drawdowns =>> Violations, raising SL, selling half if share squat • Market Direction: Interpreting health of the market: When not to trade, trade little or trade big =>> Not gut feeling • Learning high probability set ups =>> Power Play, VCP, Consolidation • Learning low risk entries like Low Cheat, 4 Day Pivot, pull back buy =>> 2 step & 3 Step entries • How to adapt to market =>> when to hold a share longer or short term • Scaling in & Out slowly =>> I used to jump in and out too fast • Lower position size when things are not working • How to handle a stock after buying =>> biggest challenge: buying was easy for me • Selling some in strength, free rolling • Time compression in the base • Watch your shares not Indexes I was well trained : I was able to be out of the market a day before Mark announced it in 2020 Bear Market How I made 322% : USIC – 5th Moved Broker Full time Work Full time trader Moved Back • This is my verified USIC Competition numbers =>> Screen Shot of Broker • Less or no trading during choppy markets • Power of compounding : low drawdowns: trading more when things were working for me • Market gives us 2 to 3 strong rallies in a year =>> that is the time to trade Minimize drawdowns =>> avoided Bear Market Holy Grail of Stocks • Don’t try to be Alchemists trying to make Gold from other substances • They tried it for centuries & spend all their lives • • • • • • Novice traders spend nearly all their time trying to find some magic formula, scan etc Understanding psychology, market direction, risk management & probabilities are key Define your style (day, swing long), Anish & I both follow O’ Neil & Mark but still different styles Don’t keep on changing your style Stick to your Rules Understand yourself • Know your strengths & weaknesses • Understand your risk tolerance • Adapt like a professional tennis player • Know the court =>> grass, clay, hard, artificial • Understand your opponent • Adapt not change your style • Cash is a Position • Post Analysis =>> Learn from mistakes How to Maximize Profits Key things to control • Average Gain/trade • Keeping a share longer doesn’t mean your average gain will be higher • Sell according to market conditions • Average Loss/trade (Minimise drawdowns) • Batting Average/trade (no over trading, play according to the market) Understanding/Interpreting Health of the Market is Key Probability • • • • Likelihood of a specific event happening, given a certain number of attempts As the number of trials increase this formula holds better Probability = 50 % chance of Head Odds 1:1 Probability & Odds • • • • • Favorable outcome = 1 Unfavorable outcome = 6-1 = 5 Odds : 1:5 What is breakeven risk/reward? 3 out of 4 shares follow the market =>> for growth stocks it could be worst: 5 out of 6 (Odd 1:5) Why to avoid trading when odds are against you Probability • Probability of an event happening over a weekend • Odd : 2:5 • Probability of drawing a red marble from a jar of 20 marbles • Odd: 1:3 Why not to take Excessive risk • • • • • Odds are 1:7 Will you bet all your money even when odds are in your favor? Probability is based on large number of trials Even if it is in your favor, there is still chance to loose That is why position sizing & stop loss are important =>> you want to live for another day Don’t put all your money in one stock even if odds are in your favor Building in the Failure - Mark In choppy or bad markets not only odds are against you but risk/reward is also against you Probability • Trade like a casino not the gambler • Odds are in the favor of Casino =>> built in edge =>> higher win rate • If odds are 50/50, they will soon be bankrupt =>> running expenses • Black Jack: Card Counting =>> played with higher bet when odds were in their favor • Jess Marcum, Joe Bernstein etc. used it • Now casinos were gambling & they were not • Casinos have to change rules : added more deck • Edward Thorp is called father of card counting =>> also tested in casinos • What does that mean? =>> Play when Odds are in your favor • Play little or not at all in tough or choppy markets High Probability Trading Put as many odds as possible in your favor • Market Direction: Trade in the long, medium & short term direction of the market • 3 out of 4 stocks follow the market • In a correction the odds of success are 1:3 • It is worst for growth stocks =>> may be as bad as 1:5 or even worst • Stock coming from a proper base • Base has elements of strength Base has elements of support, shake out • Industry Group Performance • Very Important • Most stock move in groups =>> normally easy to spot • Leaders in the Industry Group • Only top quality • High RS, Excellent earnings, ROE, New products & Services, institutional sponsorship • Risk reward ~ 1:3 • In bad market not only odds are against you but risk reward is also lower • Etc etc etc Odds & Risk/Reward - Simplified Choppy Markets/Correction: If 1 out of 4 stocks are going up Odds 1:3 In choppy markets traders tend to use risk reward of 1:2 Is that profitable? You need risk to reward of 1:3 for break even Why To Minimize Drawdowns Months 0 1 2 3 4 5 6 7 8 9 10 11 12 Gain/Loss % 14 14 -5 -5 -5 -5 14 14 -5 -5 -5 -5 Portfolio $ 10000 11400 12996 12346 11729 11142 10585 12067 13757 13069 12415 11795 11205 Gain/Loss % 13 13 -4 -4 -4 -4 13 13 -4 -4 -4 -4 Profit/Loss = 12% Years 12% 10000 11205 12555 14068 15763 17662 Profit 18% 10000 11762 13835 16272 19140 22512 26% 10000 12622 15931 20107 25379 32033 77% 125% 220% 0 1 2 3 4 5 Profit/Loss Portfolio $ 10000 11300 12769 12258 11768 11297 10845 12255 13848 13294 12763 12252 11762 18% Gain/Loss % 11 12 -2.5 -2.5 -2.5 -2.5 11 12 -2.5 -2.5 -2.5 -2.5 Portfolio $ 10000 11100 12432 12121 11818 11523 11235 12470 13967 13618 13277 12945 12622 26% Minimize your drawdowns How I Minimize Drawdowns 1. Trade Directionally =>> High Probability • Trade in the long-term, medium-term & short-term direction of the market 2. 3. Expose Progressively • • • • Don’t plunge in the market on opinion, even if things are looking great Go in slowly (go to 10, 20% and then 50% ……..) 1 or 2 stocks 5 to 6% each =>> use profits to fund next share Bend with the market =>> only increase exposure if these are working Protect break even as quickly as possible • Don’t choke the trade: • If a stock goes up, then first PB and go to new high, raise your SL to break even 4. Sell into strength =>> this made a big difference to my trading =>> Free roll the rest 5. Don’t try to sell at the top =>> chance to sell at the high is very low: • Just take reasonable profit • In a normal market, I sell some above 20% profit • Only hold for a long period if coming from bear market or deep correction How to Minimizing Drawdowns 6. Sell early if violations keep piling (sell before stop loss) 7. Sell at least half if a share squat after making a big gain at BE & consider selling all if it goes below days low =>> can always add back 8. Trade largest when you are trading your best (not market)and smallest when trading your worst or not at all 9. Cash is a position Listen to The Market - Direction • Performance of the portfolio is the best indicator • Indexes are not as important Indexes may be going up, but underlying market is weak • • • • • • • • • • • • • • Failed break outs, shrinking set ups, smaller watch list Distribution days in Indexes =>> Professional selling Divergence in indexes after a big move (could be sector rotation) Nasdaq stocks above 50D & 200 D (stock participation) Sentiments (Contrarian) Seasonality What industry groups are performing =>> Leaders, laggard or Defensive groups, sector rotation Daily Industry groups performance =>> Leaders, laggard or Defensive groups, sector rotation No of shares up vs down Actual Inflation vs Expected Inflation Advance decline line (stock participation) New Highs, new Lows Up/Down Volume Market Conditions are Key 10 Year US Treasury Yield Markets: Nasdaq 2020: Distribution Markets 2020: Divergence Markets 2020: Divergence Which Shares Were Holding Markets: Nasdaq Nasdaq: 2020: No. of Stocks above 200D?? • Market was so strong that it will take time for stocks to go below 200D Nasdaq 2020: No. of Stocks above 50D This was worrisome Market Sentiments • Contrarian Indicator • Value above 60 could be a red flag Markets 2021 Markets 2021 Markets: Nasdaq: 2021: Stock Participation? Markets: Nasdaq: 2021: No. of Stocks above 50D Advance Decline Daily Line 10 Year US Treasury Yield Seasonality Market Sentiments • Contrarian Indicator • Value around 60 could be a red flag DOCU: Daily : 2020 Power of Relative Strength during Bear Market DOCU: D: 2020 • How I handled DOCU • Sold in Strength • Could have used 21 D or 50 D AAPL: D: 2020 • 100 was an obvious resistance • Sold some in strength & rest used 50 D • Sold rest again in strangth AAPL: Weekly • RS in New Highs =>> Blue Dot Why Play small in Choppy Markets Starting Capital = 100000 Position size = Risk of total equity = Risked Amount $ = Invested amount = Stop Loss = No of shares = 8 1.25 1250 8000 15.63 12.5 Starting Capital = Position size (%) = Stop Loss (%) = Risked Amount $ = Invested amount = Risk of total equity (%)= 100000 8For Choppy markets 5 400 8000 0.4 even if my 10stocks fail, I must not loose more than 4 percent 15 1.25 1250 15000 8.33 6.7 20 1.25 1250 20000 6.25 5.0 25 1.25 1250 25000 5.00 4.0 30 1.25 can make it 2.5% in good market 1250 30000 4.17 3.3 • My maximum risk per trade for normal position is 1.25% of the portfolio • In choppy market, tighten SL to 5% and position size to 8% • Risk to total equity reduces to only 0.4 % • Even if we are wrong 10 times in a row, we may lose around 4% • If reduce position size to 6%, the risk will be even lower Reduce Draw Downs Buying – Trend Template - Mark Base Structure Analysis • Have a high probability base (Power Play/High Tight, VCP etc. etc.) • A prior uptrend of 30% • Length of the base: the longer the better • Does base contain elements of strength • • • • Daily Gaps up on volume Relative strength line at new high (blue dot, or near high) Tight weeks More accumulation the distribution especially on the right side of the base • Does base contain elements of support • Support weeks • Base on top of base • Has there been a “Shake Out” near the lows of the base • Does the stock surge higher on volume at the pivot point • Time compression in the base Base Analysis: PAG • Textbook VCP, gap up, smooth pull back, nice right side, accumulation on weekly • Accelerated earnings, and sales, No of Funds increasing, U/D Volume 1.4, ROE, 17%, good weekly closes Base Analysis: PAG • Accelerated earnings, and sales, No of Funds increasing, U/D Volume 1.4, ROE, 17% • Good weekly closes Recent Trades: PAG Recent Trades: MRNA • Textbook set up IT: D: 2021 • Verry tight on daily • RS at new high IT: Weekly • Accumulation • Weekly tight closes My Favorite Set-Ups • Power Play • stocks are very powerful & live in their own world (Leif 2019 USIC Champion has mastered it) • high probability trade & impacted less by the market • Consolidation • Very powerful especially in choppy or market pullback, RS, high probability • • • • • • • VCP & Cup with Handle Low Cheat =>> lower risk Cheat Pullback buy At times W I don’t use trend lines & other set ups Just use 21D, 50 D, 100 D & 200D along with RS along with Price & Volume action Handling Stocks & Markets Have to handle shares differently depending upon where we are • Market in uptrend • Coming from bear market =>> High RS, new leadership, many multi baggers =>> hold leaders longer • From deep correction =>> High RS, some multi baggers =>> hold longer • From consolidation or choppy market =>> High RS, less multi baggers =>> • take at least some profits in strength, most stocks will form bases after 20 to 30% move • Powerful Rally =>> Take at least some profits in strength & set the rest with 21D or 50D • Extended/blow off/weakening =>> watch market indicators • Reduce exposure • Sell in Strength • May buy large cap • Sideways or Choppy/sector rotation • Tight stop loss, small position sizes, progressive exposure, High RS • Quick profits • Market in correction=>> Keep an eye on follow through day, a stock with high RS breaking out • Deep Correction • Bear Market Selling & Handling Stocks How to Handle Stocks Buying is easy, selling and handling of stocks is way more difficult • Keep losses small • Move SL to breakeven ASAP • Don’t let a good size gain turn into loss • Defensive selling (minimize drawdowns) • Stop Loss (Tighter SL in choppy markets) • Violations & Sqat (help to reduce overall drawdowns) as probability is way lower now • Offensive selling =>> Market conditions is key • Take smaller profits in choppy or extended markets • Selling some in the strength, moving up SL & free roll the rest • Sell once stock hit 20 to 30% gain in normal market • Most stocks form basis after 20 to 30% gain • Hold longer when coming out of Bear Market or deep correction • Use 21D, 50D etc to sell (sometimes 9D) Bullish Signs • Follow through price action after a breakout=>> 2-3 follow through days • Quiet price action after breakout • More up days than down days & more up weeks than down weeks • 3 up days out of 4, 6 up days out of 8 =>> hard to buy • Tennis ball action – price snap back after pull back or natural reaction • Strong volume on up days & weeks Vs down days & weeks • More good closes than bad closes • 3 lower lows with small price action are not worrisome – natural reaction • Big down days especially with heavy volume are worrisome =>> consider selling • Reversal recovery from squat NVDA: How I handled it • VCP Action, Base shows element of strength =>> gap ups, accumulation, 5 follow through days, tennis ball action • Buy Point = 158.30, Stop Loss = 151.76 (4.1%), violations, squat • Raised SL to BE once it was up over 10% • Sold 50% in strength (19 % profit) & rest after it broke 21D Violations & Bearish • Low volume out of base and high volume back • Three or four lower lows without supportive action • Big down days with heavy volume are more worrisome • • • • • • More down days than up days More bad closes than good closes Close bellow 21D soon after the break-out =>> lowers odds A close below 50D on heavy volume Retracement of a good size gain Wide price action/increase volatility on volume Defensive Selling: Violations Violations: GM: Market Base shows element of strength =>> gap ups, accumulation in weekly, calm PB GM-W Look for Warnings - Mark • New highs from late fourth and fifth stage bases • P/E expansion by twice or more during late-stage price action • Climax run or blow-off top (price up 25 to 50 percent or more in one to three weeks) • On extended stocks, 70 percent or more up days versus down days over a 7- to 15-day period • Once the stock is extended, 6 to 10 days of accelerated advance with all but 2 or 3 days being down In addition: • Look for the largest up day since the beginning of a long move during the fast run-up. • Look for the widest daily spread from high to low. • Look for recent exhaustion gaps. • High-volume reversals • Elevated volume without much price progress—“churning” • The stock price down on the largest volume since the beginning of the move My Routine -Weekly • • • • • • Review health of the market Review my short notes Review Mark preliminary list Market Smith Industry Group Performance Review IBD-50 Review MS Growth 250 (IBD) • IBD Sector Leaders, IBD Industry themes, Industry snapshot • RS Scan/Blue Dot =>> especially side-ways or when market in correction • Probably the best scan in difficult markets • • • • Break away gap Read “The New America” (IBD) Narrow down to 20 to 30 stocks Post Analysis Market Smith - Industry Groups Market Smith - Industry Groups METC: Energy: Coal: D METC: Energy: Coal: Weekly • Tight weekly closes • Accumulation METC: Energy: Coal • Sold in strength Trading Plan Buying: • Buying Criteria: An entry “mechanism” that determines precisely what triggers a buy decision • Why you bought it • Buy Point • How will you position size Selling: • Know where you are getting out: =>> How you are going to deal with risk • what will you do if the trade moves against you, or if the reason you bought the stock changes suddenly? • Defensive sell ~ 6-7% (or lower) stop loss, Multiple violations, squat • Offensive sell – how you are going to lock in profits =>> depends on the market Help you to make good decisions when you are under fire My Daily Routine • Mark additions to watch list • Daily %age change – Industry groups – what sort of groups are performing • Socks on the move (IBD) =>> leaders moving on high volume • IBD – Big picture, psychological market indicators • RS line Blue Dot : RS line on new highs (MS) • Breaking out today (MS) • Update my Pretend Buys (not paper trading, very useful in difficult markets) • Post Analysis • Etc. etc. Trade Like Mark • • • • • • • • • • • • • • Mark have trusted me with his account =>> I have to trade for him Every day, week & month I will be appraised Goal is to trade like Mark =>> Profit is not the goal Stick to Rules & Discipline =>> I will be JUDGED on that I am my biggest enemy => Calm down, No rush, No Panic Risk Management is key No Impulsive buying/selling: don’t be impatient =>> FOMA If trade goes against you, don’t panic =>> stick to rules Don’t let losses run on hope: Sell when wrong, don’t change stop loss Don’t Jump in and jump off in one go without real reason: Impulsive, fear, panic Don’t take big positions =>> go slowly Don’t waste money in day trading Don’t waste money in Shorting =>> no shorting of stocks Don’t look at the markets but stocks =>> how they are behaving Trading on the Day • Review Daily Reminder List • Focus List • 6 or maximum 9 stocks to watch for the day • Charts of Focus stocks on the screen • Marked buy points on chart – line • Have a summary hard copy • Ranked list • • • • • • • • Preference to Power Play Industry groups RS Line/Blue Dot Base Structure Prefer a stock if the industry group performance is excellent Have the main list on the screen =>> to see the overall health of the market If had only money for 1 stock (in good market) but like two stocks, the use margin for the day Sell something by the end of the day Concentrate on few best stocks Daily % Change – Industry Groups Daily % Change – Industry Groups Blue Dot Example: Boot: Blue Dot Example: AXP: How I trade Trade with probabilities in my favor • Market must be in uptrend (long term, medium term and short term) • Buy from a tight areas =>> SL is low, low risk entry, preference to strong industries • Only trade high probability set ups • In strong market start with my full position =>> 15%/trade =>> easy to reduce than add in strong market • I buy 7 stocks =>> used to buy 4 stocks of 25%/trade but was missing big gainers • 1.25 % risk of total equity/trade • Difficult Markets: • • • • • Go slowly: Move in increments 10, 20, 50 to 100% invested Position size: 1 or 2 stocks 5 to 6% each =>> use profits to fund the next share If continues to work then may go to 10% and then to 15% and raise exposure to 50%, 75% and 100 % If not working, getting stopped out then just pull back Bend with the market =>> trade the largest when market is good & smallest in choppy or difficult market • Trade the largest when market is good & smallest in choppy or difficult market • If last 2 trades show losses reduce position size to 8% and then 5% • Do not to trade when probability is low Best of Luck