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Insights from Trading Legend Mark Minervini


TRADERS´ – Your Personal Trading Coach | www.tradersonline-mag.com

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.

30
Cover story

» Consistency Wins the Race F1) Strong Breakout Trade


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 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.
consistency is what differentiates
Source: www.tradesignalonline.com
the pros from the amateurs, the
timeless legends from the one hit
wonders.
During his career, the author has witnessed many gains like the market’s money instead of their money, and
people make millions of dollars during good times, only in due time the market takes it back.
to give it all back and even go broke. We are going to tell Let us say someone buys a stock at $20 a share. It
you how to avoid that fate. climbs to $27. Then the investor decides he can “give it
room” because he has a seven point cushion. Wrong!
It is Your Money, but Only as Long as You Protect it Once a stock moves up a decent amount from its purchase
To achieve consistent profitability, you must protect price, Mark Minervini usually gives it less room on the
your profits and principal. As a matter of fact, Mr downside. He goes into a profit protection mode. At the
Minervini does not differentiate between the two. A big very least, he protects his breakeven point. He is certainly
mistake many traders make is to consider trading profits not going to let a good gain turn into a loss.
as house money, acting as if that money somehow is At the end of each trading session, when you review
less their own to lose than their original starting capital your portfolio, ask yourself this: Am I bullish on this
is. If you have fallen into this mental habit, you need position today? If not, why am I holding it? Does your
to change your perception immediately to achieve original reason for going long remain valid? End every
superperformance. trading day with a frank appraisal of all your positions.
Let us say the author makes $5,000 on Monday. He We are not suggesting that you not allow a stock to go
does not consider himself $5,000 “ahead of the game,” through a normal reaction or pullback in price if you
free to risk that amount shooting for the moon. The believe the stock can go much higher.
account simply has a new starting balance, subject to Of course, you should give stocks some room to
the same set of rules as before. Once he makes a profit, fluctuate, but that leeway has little to do with your past
that money belongs to him. Yesterday’s profit is part of gain. Evaluate your stocks on the basis of the return
today’s principal. you expect from them in the future versus what you are
Do not fall into the faulty reasoning of amateur risking. Each day, a stock must justify your confidence in
gamblers. Through consistent play and conservative holding it for a greater profit.
wagering, a player picks up $1,500 at the blackjack table.
Then he starts to make big, reckless bets. In his eyes, he Avoid the Big Errors
now is playing with house money. This happens all the Recently, the author had a chance to speak with Itzhak
time in the stock market. Amateur investors treat their Ben-David, coauthor of the study “Are Investors Really

31
cover story www.tradersonline-mag.com 08.2015

F2) Booking 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
In November 2014, Mark Minervini bought a questionable “V”-shaped breakout at Alcoa (AA). As the stock thing we can guarantee: if you cannot
did not confirm the breakout but started to go lower, the mistake was recognized and the position closed for learn to accept small losses, sooner
a small loss.
or later you will take big losses. It is
Source: www.tradesignalonline.com
inevitable.
To master the craft of speculation,
you must face your destructive
Reluctant to Realise Their Losses? Trading Responses to capacity; once you understand and acknowledge this
Past Returns and the Disposition Effect.” The tendency capacity, you can control your destiny and achieve
to sell winners too soon and to keep losers too long has consistency. You should focus a significant amount
been called the disposition effect by economists. of time and effort on learning how to lose the smallest
Mr Ben-David and David Hirshleifer studied stock amount possible when you are wrong. You must learn to
transactions from more than 77,000 accounts at a large avoid the big errors.
discount broker from 1990 through 1996 and did a variety
of analyses that had never been done before. They Practice Does Not Make Perfect
examined when investors bought individual stocks, when Mark Minervini knows people who have managed
they sold them, and how much they earned or lost with money on Wall Street for decades yet have only
each sale. mediocre results to show for it. You would think that
They also examined when investors were more likely after all those years of practice their performance
to buy additional shares of a stock they had previously would be stellar or at least would improve over time.
purchased. Their results were published in the August Not necessarily. Practice does not make perfect. In
2012 issue of the Review of Financial Studies. fact, practice can make performance worse if you are
The study highlights several interesting conclusions: practicing the wrong things.
When you repeat something over and over, your brain
• Investors are more likely to allow a stock to reach a strengthens the neural pathways that reinforce the action.
large loss than they are to allow a stock to attain a The problem is that these pathways will be reinforced for
large gain; they hold losers too long and sell winners incorrect actions as well as correct actions. Any pattern
too quickly. of action repeated continuously will eventually become
• The probability of buying additional shares is greater habit. Therefore, practice does not make perfect; practice
for shares that have lost value than it is for shares only makes habitual behaviour.
that have gained value; investors may readily double In other words, the fact that you have been doing
down on their bets when stocks decline in value. something for a while does not mean you are guaranteed
• Investors are more likely to take a small gain than a success. It could be that you are just reinforcing bad
small loss. habits. The author subscribes to the advice of legendary

32
Cover story

football coach Vince Lombardi. As he said, “Practice does T1) Loss versus Gain Asymmetry
not make perfect. Only perfect practice makes perfect.
In the stock market, practicing wrongly will bring Loss Gain to Break Even

you the occasional success even if you are using flawed 5% 5.26%

principles. After all, you could throw darts at a list of 10% 11%
stocks and hit a winner once in a while, but you will not 20% 25%
generate consistent returns and eventually you will lose. 30% 43%
The reason most investors practice incorrectly is 40% 67%
that they refuse to objectively analyse their results to 50% 100%
discover where their approach is going wrong. They
60% 150%
try to forget the losses and keep doing what they have
70% 233%
always done.
80% 400%
The proliferation of cheap brokerage commissions,
90% 900%
Internet trading, and web-based stock market data may
have provided everyone with the same technology, but it did 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.
not grant investors an equal ability to use those resources.
Source: www.minervini.com
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 Psychologist Henry L Roediger III, who is the principal
it takes time and practice. What is important is that you researcher for the department of psychology at Washington
learn how to practice correctly. University in St. Louis, conducted an experiment in which
students were divided into two groups to study a natural
Avoid Paper Trading history text.
As new investors learn the ropes, often they engage in Group A studied the text for four sessions. Group B
paper trading to practice before putting real money at studied only once but was tested on the subject three
risk. Although this sounds reasonable, Mr Minervini is times. A week later the two groups were tested, and
not a fan of paper trading, and he does not recommend group B scored 50  per cent higher than group A. This
doing it any longer than absolutely
necessary until you have some
money to invest. Paper trading is F3) Textbook SEPA© Setup
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 This buy setup in late February 2015 in Amphastar Pharmaceuticals (AMPH) was emerging from a classic
volatility contraction pattern.
sense of security and impede your
Source: www.tradesignalonline.com
performance and learning process.

33
cover story www.tradersonline-mag.com 08.2015

You should trade with real money


as soon as possible.

demonstrates the power of actually doing the thing be to become a specialist in your approach to the
you are trying to accomplish versus preparing for it in market.
simulation. Although strategy is important, it is not as critical
If you are just starting out, you should trade with as knowledge and the discipline to apply and adhere to
real money as soon as possible. If you are a novice your rules. A trader who really knows the strengths and
trader, a good way to gain experience is to trade with an weaknesses of his or her strategy can do significantly
amount of money that is small enough to lose without better than someone who knows only a little about a
changing your life but large enough that losses are at superior strategy. Of course, the ideal situation would be
least somewhat painful. to know a lot about a great strategy. That should be your
Do not fool yourself into a false sense of reality. Get ultimate goal.
accustomed to trading for real because that is what you
are going to have to do to make real money. Invest in Yourself First
When the author began trading in the early 1980s, he
Commit to an Approach endured a six-year period when he did not make any
You do not need a PhD in math or physics to be successful money in stocks. In fact, he had a net loss. It was not
in the stock market, just the right knowledge, a good work until 1989 that he began to achieve meaningful success.
ethic, and discipline. The author’s SEPA® methodology What kept him going? Unconditional persistence! An
was developed after decades of searching, testing, and investment in knowledge, which takes time to acquire, is
going back to the drawing board countless times to an investment in yourself, but it requires persistence.
uncover what actually works. When you make an unshakable commitment to a
You, too, will go through your own trial and error way of life, you put yourself way ahead of most others
period: window shopping and trying various concepts in the race for success. Why? Because most people
and approaches to the stock market, whether value, have a natural tendency to overestimate what they can
growth, fundamental, technical, or some combination.
In the end, to succeed, you will need to settle on
an approach that makes sense to you. Most important,
you must commit to perfecting and refining your
understanding of that methodology and its execution.
A stock trading strategy is like a marriage; if you are
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 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
cover story

Many of life’s failures are people who did not realise


how close they were to success when they gave up.
Thomas Edison

achieve in the short run and underestimate what they cannot be changed, only learned from. Most important,
can accomplish over the long haul. They think they have never let rotten days make you give up.
made a commitment, but when they run into difficulty,
they lose steam or quit. Conclusion
Most people get interested in trading but few make To realise profits from investing in stocks, you must make
a real commitment. The difference between interest three correct decisions: what to buy, when to buy, and
and commitment is the will not to give up. When you when to sell. Not all of your decisions will turn out to be
truly commit to something, you have no alternative but correct, but they can be intelligent.
success. Getting interested will get you started, but It is true that the market is brutal to most of the people
commitment gets you to the finish line. who challenge it. But so is Mount Everest, and that should
The first and best investment you can make is an not – and does not – stop people from trying to reach the
investment in yourself, a commitment to do what it top. What is expected of a mountain or a market is only
takes and to persist. Persistence is more important than that it has no favourites – that it treats all challengers as
knowledge. You must persevere if you wish to succeed in equals.
anything. Knowledge and skill can be acquired through Trading can be an intellectual stimulation, as well as a
study and practice, but nothing great comes to those who way to make money. Played well, it demands skills of the
quit. highest order, and skills the trader must work very hard
to acquire. A well-conceived and executed transaction
Expect Some Rotten Days is a thing of beauty, to be experienced, enjoyed, and
The key to success is to become a successful thinker and remembered. It should have an essence transcending
then act on those thoughts. That does not mean that all monetary reward.
your ideas and actions will always produce the desired The stock market provides the greatest opportunity
results. At times you will feel that success is unattainable. on earth for financial reward. It also teaches great lessons
You may even feel like giving up. The author knows. He to those who win and those who lose, an education
has been there. Along the way he had days when he that goes well beyond trading and investing. Without a
felt so demoralised by his unsatisfactory results that he doubt, the stock market gives you incredible exhilaration
almost threw in the towel and gave up. when you win and deep humility when you lose. It is the
However, Mark Minervini knew the power of greatest game on earth. «
persistence. Then, after more than a decade of trial and
error, he was making more money in a single week than Excerpts taken from Trade Like a Stock Market Wizard:
he dreamed of making in a year. He experienced what How to Achieve Superperformance in Stocks in any
the English poet and playwright Robert Browning meant Market, Copyright 2013 Mark Minervini – published by
when he wrote, “A minute’s success pays the failure of McGraw Hill.
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 Mark Minervini
what you want and expect some setbacks, some Mark Minervini is one of America’s most successful
stock investors. Starting with only a few thousand
disappointments, and some rotten days. Embrace dollars, he turned his personal trading account into
millions. Mark educates traders about his trading
them all as a valuable part of the process and learn to methodology through Minervini Private Access, a
say, “Thank you teacher.” platform that allows users the unique experience of
trading side by side with him in real time.
Be happy, feel appreciative, and celebrate when you www.minervini.com
win. Do not look back with regrets at failures. The past

35
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