To The Moon

Continuing the “technofundamental” approach to market trading, this article with be focused on another more modern legendary trader, Mark Minervini.

DISCLAIMER: His books and course offer too much material for study and thus this article cannot be considered a replacement.

The image has been taken fromhttps://www.tradingreviewers.com

Mark Minervini was born in 1965 in Queens, New York, and bought his first stock at the age of 18 in the year 1983, although he would be profitable at a later point in his career in the late 80s.

He hasn’t spoken much about his family and private life, and education, so this information is not known, although in his interview he mentioned that he “started as a quant”. He might have also attended the University of Maryland.

The facts that are known for him are his contribution to the CMT association, which educates the public about technical analysis, and his inclusion in the book “Stock Market Wizards” by Jack Schwager. Mark has also been a work associate and friend with the trader and portfolio manager David Ryan.

One of his role models was Richard S. Love and his book “Superpeformance Stocks”, which played a huge role in his trading style, as well as the works of William O’Neil, and his company IBD.

His books include the titles “Trade Like a Stock Market Wizard” (2013), “Think & Trade Like a Champion” (2016), and “Mindset Secrets for Winning”.

In his free time, he plays the drums, and he also shared his performance on hisYouTubeprofile, and his Twitter handle is@markminervini.

His net worth is estimated to be around $30'000'000.

His favorite tools and services are theeSignal charting platform,TradeStation broker,Briefing.com for market news, andMarketSmith stock screener.

“Minervini’s performance has been nothing short of astounding. Most traders and money managers would be delighted to have Minervini’s worst year — a 128 percent gain — as their best.”

— Jack Schwager

The SEPA® Trading Methodology

Minervini’s Specific Entry Point Analysis® (SEPA®) is what he has also described as his trading style as “conservative aggressive opportunist”, meaning that he would combine technical and fundamental analysis to enter a position from a very low risk, he will follow his position in order to achieve relatively significant compounding gains, with either long or short direction, and he would close his position very quickly in case that he is wrong.

Growth Stock Company Categories

Mark Minervini separates companies that seem tradeable to him into four main categories for long positions and two for short.

1. Long: Market Leaders= Market Leaders are the first to start moving in a bull run, supported by high PE and a near their 52-Week high price, usually small or mid-cap.
2. Long: Top Competitors= Top Competitors are the “second best” companies in an industry, after the leader.
3. Long: Institutional Favourites= Institutional Favorites are stocks that would fit O’Neil’s “I” in his “CAN SLIM” method.
4. Long: Turnaround Situations= The Turnaround Situation companies are equal to the “N” in O’Neil’s “CAN SLIM” method.
5. Short: Cyclicals= Companies that rise and fall according to the market, for both long and short positions.
6. Short: Laggards= Shorting opportunities.

Company Scanning

Within the categories mentioned above, Mark Minervini looks for stocks according to the following criteria:

Technical

• Price above the 200-day and 150-day averages, with the 150-day moving average being above the 200-day moving average, and the 200-day moving average is moving upwards for a while.
• Price at least 30% above the 52-week low, and ideally around 25% away from its 52-week high.
• Relative strength greater than 70.
• The price finds itself in the second stage of its cycle (explained below).
• High trading volume, strong daily price increase, and upward gaps are also indications that the stock has caught the attention of the market.

Fundamental

• Similar to O’Neil’s accelerated earnings (EPS), revenues, and profit margins on a quarterly basis.
• At least a 10% rise in sales growth.

Also Suggested

• A new product, management, business category or sector, or any other catalyst could drive an uptrend.
• Although the price is moving upwards the PE ratio doesn’t change as much since earnings are also growing.
• Small float, meaning limited supply.

I have created a stock scanner according to Minervini’s criteria on Finviz which can be foundhere. You may comment below if you’ve found it useful.

Technical Analysis

Minervini’s analysis includes Stan Weinstein’s four-stage cycle of consolidation, accumulation, distribution, and capitulation.

A key note here is that not all stocks follow this exact cycle. Some stocks might start from stage one, and move to stage four directly.

A helping tool for this analysis is the 200-day simple moving average. If the price stays above the SMA after stage one, then is a confirmation that the stock enters the second stage.

Additionally, the price should also be above the 52-week low, and since Minervini uses IBD’s software MarketSmith, the relative strength rating should also be strong.

1. Consolidation= In this stage, stock buying should be avoided.
2. Accumulation= Most winners find themselves in this stage. Buying phase. This stage should be the main focus, as the average volume is growing.
3. Distribution= In this stage, stock buying should be avoided.
4. Capitulation= In this stage, stock buying should be avoided, or should be go shorted.

The image has been taken fromhttps://talkmarkets.com/

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The above technical stages are been translated into the following fundamental data.

The image has been taken fromhttps://www.elearnmarkets.com/Key LessonsGeneral

• A great company is not always a great stock, and vice versa.
• Price action reflects market sentiment and expectation. Fundamental analysis, together with financial statement analysis is subjective, according to Mark Minervini.
• Trading is a marathon and not a sprint. One should plan for the long term.
• Trading is all about discipline, risk management, and finding systems with an edge (winning criteria).
• The best IPOs are the ones that start in bear markets. Not many people pay attention to them, although they are making solid bases.
• One should understand that trading doesn’t mean having all the time an open position, nor being fully invested. In fact, trading is about taking small gains often, because bigger moves do not occur often, but also allowing winners to run, when possible.

Fundamental Analysis

• Although fundamentals play a fairly big role in Minervini’s pricing, he certainly doesn’t consider himself a value investor nor does he claim that he knows much about it.
• Minervini mentions again and again that the “value investing mentality” of buying a stock at a cheap price can be fatal to a growth investor. On the contrary, a growth stock trader needs to buy stocks with a high P/E ratio and head for a higher P/E ratio.
• Like William O’Neil, Mark Minervini is looking for acceleration in a company’s earnings per share. The EPS needs to be greater than the previous quarter and be in an uptrend.

Technical Analysis

• New earnings numbers affect a stock’s price by creating earning gaps because the asset is been repriced according to the new data available.
• A correct entry point would be when a volatility contraction is been observed, followed by an upwards breakout with anabove-the-normal bullish volume and thus breaking the base upwards. The stop-loss, of course, needs to be under the base formation in the contracted volatility area.

The image has been taken fromhttps://www.vantagemarkets.com/

• After the entry, the green days need to be more than the red days, with trading days and small corrections.
• Minervini checks his charts on both weekly and daily timeframes. William O’Neil was focused on the weekly timeframes.

Exit Points

• One indicator of a good exit point would be the rise of volatility. This would be the opposite of a good entry point where the volatility needs to be contracted before the stock starts to trend.
• A greater than normal downward move, accompanied by larger than normal volume, is a good exiting indicator.
• There are two types of stops. The “technical” is set according to technical analysis, and the “mathematical”, which is the accepted risk one is willing to take for the expected return. Both need to be known before entering the trade.
• Greed is another emotion that a trader must fight. He or she should never let a sizeable winning position turn into a losing position. If the average gain so far is 10%, one should expect to close a winning trade at least ± 5%.
• When in doubt about the future of a winning trade, a trader should sell half of his or her position and move the stop loss to a break even.

Risk Management

• Mark Minervini has said, “the only way to avoid a bigger loss is to take a smaller loss”.
• After a successful entry, a trailing stop-lossshould accompany the position. Manually moving the stop-loss, of course, is also an option.
• If it is in one’s control, one shouldn’t let the risk per trade go below a percentage loss. Of course, gaps can add up to the loss, but in these cases, there is nothing one could do about it. The percentage gain to recover from a loss is far greater than the loss.

The image has been taken fromhttps://www.quora.com/

• Mark Minervini also uses the R-multiples. More information about them can be found in the “Basic Money and Risk Management for Traders” article.
• A trader’s job is to fine-tune things that he or she can control, like which asset to buy, and when to buy it.
• Pyramiding (referred to by Minervini as “progressive exposure”) is also something that Mark Minervini would follow. When the trade is going in one’s favor, he or she needs to add up to the winning trade. The opposite is also true. Of course, together with moving the stop loss in order to protect your invested amount and profits. The question one needs to answer before opening an additional position is “would I have bought the asset here if I didn’t have the initial position?”.
• Each position should have between 1.25% to 2.50% of the total account size, with the percentage of the combined position not being more than 25%. (75% or less of the account must be cash).

Journaling

• A journal needs to track each position’s entry point, exit point, and the duration that the position remained open. From this data, one can calculate the average gain per trade, the average loss per trade, the risk-to-reward ratio, the frequency of wins (referred to by Minervini as “batting average”), the adjusted win-to-loss ratio (AWLR) which is calculated together with the batting average (average gain times batting average), and the frequency of losses.

• All the journal data regarding the trades can also be visualized in the form of a distribution. Of course, the skew needs to be towards the winning trades, the losing trades must not have any long tails.
• The main reason to track the duration, in days, for the opened position is to be sure that one “cuts losing trades short, and lets winners run”. If the duration of the losing trades is longer than the duration of the winning trades, it means that one tries to oppose his or her beliefs to the market, and he or she is not letting the market show what needs to be traded.
• From a journal one could not only learn about his or her performance metrics but also he or she can value all the trades included against the actual price chart. “Did all the rules followed?” and “could anything be done differently?” are just some of the questions that can be answered through this process. In that sense, replaying each trade can not only help with strategy development and finding an edge, but also in the self-improvement of the trader.

Options

• By selecting the nearest strike price to the current last traded price of the asset at the nearest expiration date, and by adding the ask prices of both the calls and the puts in this particular strike price, times 100, one can find out an approximation of the expected volatility.

Closure

This article will close by sharing a video that Mr. Minervini would maybe like to stay hidden, but I personally can see how detached is the main finance and investment media, from the (day) trading business.

“The beautiful thing about trading is that it is just like poker. There is a saying (about poker), “all you need is a chip and a chair”. Then, guess what, it's up to you. Up to your talent. You don’t need a whole lot. It's down to you. It's down to the skill. There are no indicators that are going to make you rich. If you are going to use stochastic, great. My father used to say “I don’t care what you are going to do, just be the best at it. Go all in at it. I’ve picked this style, stuck to it for 40 years, and became an expert at it. Just pick something. It’s doesn’t need to be this. You are not going to be good at everything… It a game of skill… Give yourself the time to become great.”

— Mark Minervini

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