3 X US Investing (Stock Trading) Champion - David Ryan
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What better way to discover the secrets of profitable trading than reviewing the approach of three-time US investing champion, David Ryan.
David famously compounded a return of 1379% in three consecutive years.
He worked for William O’Neil & Company for 17 years and became O’Neil’s protégé using his Can Slim trading strategy, a strategy we covered in a previous video.
Speaking of his experience with O’Neil, David said:
“I studied historical models of great winning stocks to ingrain in my mind what a stock looked like before it made a major move. I tried to get to the point where I was looking at the exact same things O’Neil did. He was my role model.”
David himself has clearly become a role model himself too, his son Sean Ryan returned a respectable 128% in the 2020 US Investing Championship, showing also that the strategy can certainly be taught. Notice in the same year Oliver Kell returned a staggering 941%, using many of the same principles we discover shortly.
Let’s take a look at David’s method and see how we can apply the same to our own strategy.
I found an interview between David and Investors Business Daily which gave same good pointers into his thought process.
David provides the platform to his approach when he says that he focuses on the weekly charts, as opposed to the daily or intraday time frames where there is far more noise. David says he looks through hundreds of stocks during a weekend after the market close, an approach I take myself.
When asked what kind of stocks he looks for, he simply says “buy what you know”, “look at the brands around you, look at the items you use, the clothes you wear”. David also points to the example of the Apple Iphone and how the stock has risen tremendously over the years, in fact Apple has risen by over 1800% since 2010.
Once you have an awareness of all these products, David says the next step is to check to see if the stocks fit within the characteristics of the Can Slim criteria, something we covered previously on the channel and detailed further in O’Neil’s book.
In essence, the focus is on company earnings growth, the product or service offered, the ability to satisfy customer demand, is it a leading company within its field, are institutions interested and is price trending in a positive direction. These are generally the fundamental factors to consider, but we also need the alignment of technical criteria before the timing of a purchase is determined.
Let’s look at a price chart of a stock called Ollies Bargain Outlet, it’s a stock David bought into not only due to it aligning with the Can Slim criteria, but also due to its chart pattern. Here David saw the notorious cup and handle set up and took a position here at the break of the handle for a price of around $23 per share. The stock grew by more than 400% over a 36-month period, although numerous other breakout buy points could have been used to add to the position during its rise.
Looking for positive earnings per share during its increase was again a key metric.
Before we move on I’ll just give a quick plug for myself, I also make breakout trades off the weekly charts, I share my positions in our group on my website, where you can also find a PDF of my strategy and a bespoke breakout scanner to take much of the leg work away, check out the link below.
Let’s look at some other nuggets of advice from David.
David emphasises the importance of post analysis and says that in doing so himself he managed to become a consistently profitable trader. One of the major findings he discovered when looking through his past trades was his habit of buying over extended stocks, he said:
“ I found that although I was buying out of solid bases, I was buying too late, for example if a stock broke at $30 I was not buying until it was $35, doing this frequently meant my account was really suffering “
His comment really resonates with my analysis too, buying too late out of a base by just a small margin can have a huge impact on overall performance.
If for example we assume the breakout price to be here at $30, and a stop loss is positioned here at perhaps $27, we would be risking 10% on the position. If however we bought here at $35 whilst maintaining the same stop loss rationale of $27, we would more than double the risk to almost 23%.
To understand the impact of this doubling of risk, we need to look at the risk reward equation.
Let’s loosely use the previous example of buying late at an extended price of $35 and buying closer to the breakout at $30. To keep the numbers simple we will call the stop loss for the extended entry 20% rather than the 23%, and for the breakout stop loss we keep it at 10%.
We assume a target price of $42 in both scenarios.
We can now calculate the potential risk reward ratio for each.
The extended price provides a risk of $7 and a reward of $7, equating to a 1 to 1 ratio.
The earlier breakout price provides a risk of $3 and a reward of $12, equating to a more favourable 4 to 1 ratio.
If we now look at the table above, we can see that buying at the extended price with a ratio of 1 to 1, we would need to have winning trades 50% of the time just to breakeven, and with trading costs it’s likely to be closer to 60%. Whereas buying closer to the breakout which offered a 4 to 1 risk reward ratio we would only need to be right just over 20% of the time to breakeven.
My longer-term ratio and win rate is around here, meaning there is plenty of scope for error, and over hundreds of trades this has a huge impact on overall returns.
David suggests his average risk is closer to 7% across all of his trades.
Other than the initial stop loss position David looks for other sell criteria when managing a trending position, he says he looks for two things, a climatic acceleration or increased volatility.
In terms of a climatic move, David suggests drawing a trend line or channel over the price chart, and as soon as price moves too far away, he would consider selling all of part of his position.
Similarly, if price becomes too volatile with bigger up days and bigger down days, David would again start to reduce or sell his position.
He summarises by saying, “It’s like studying an animal, certain stocks or certain animals have certain characteristics and a certain way of behaving, you need to recognise when those characteristics are changing and act accordingly”.
It’s a similar theory to my approach, although I prefer a little less subjectivity by using the Mack Dee indicator. The stock will behave in a stable manner but then start to tire, losing its momentum, and at the cross I will start to tighten my risk management.
So, what have we learnt from the three time champion….
We know David gained huge knowledge by working along side one of the most credible traders in the game, studying the characteristics of the best performing stocks in history from the weekly charts.
David says buy what you know, look for earnings growth, new products, and sector leaders within a positive trend.
Look to enter from bases of consolidation in alignment to earnings growth.
Look at your past trades, learn from your mistakes and avoid buying stocks which have extended too far from its base.
Understand the price action of each individual stock and manage any change accordingly.
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