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Mark Minervini - Stock Trading Wizard

Updated: May 25, 2021

Mark Minervini - Trade Like A Stock Market Wizard - Animated book review.

Stock trading strategy - SEPA System.



Hello and Welcome to the Financial Wisdom channel .

In this video we review the book by Mark Minervini -Trade like a stock market wizard

How would you like to achieve super performance in the stock market, and average 220% return per year for 6 years!

We explore the book and present the key criteria Mark Minervini used to do just that.

But before we begin, who is Mark Minervini?

Mark Minervini is best know as a technical analyst, acclaimed author, instructor, and independent trader

Mark became a star in the trading community when he achieved a 155% annual return to win the 1997 U.S. Investing Championship.

Let’s take a look….

As the subtitle suggests the books focus is on achieving super performance in the stock market.

Mark averaged 220% per year from 1994 to 2000 (a 33,500% compounded total return)

To illustrate this incredible performance, lets look at how a £10,000 account would have grown throughout that period.

This truly IS super performance, and demonstrates the impact of compounding returns.

The key message here is to keep reinvesting and compounding those profits, if there are frequent withdrawals then the true impact will not materialise, and neither will the super performance returns.

Mark Says;

“You must stay focused on what you’re trying to accomplish.”

Mark classifies himself as both a technical and fundamental analyst.

He relies on price and volume.

And fundamentals to enhance the odds of success.

The methods he described are similar to the CANSLIM system that Mr William O’Neil teaches.

Including the Cup and Handle setup which we will explore later in the video.

It is not surprising Mark uses a similar approach because he went through the same process as O’Neil, where he studied tons of past stock winners to identify what exactly led to stock performance. Here is an example of the stock price for the company calledCrocs :-

Through analysing such charts he went on to formulate his own SEPA system, which stands for Specific Entry Point Analysis, to pinpoint the best time to enter a stock.

Let’s look at the SEPA system Mark describes in the book…

There are Five Key Elements

The Trend: The price is in a definite uptrend.

Fundamentals: An Improvement in earnings, revenues, and margins.

A Catalyst: A Hot-selling product, approval by FDA, a new CEO, or a new contract.

Entry Points: Enter a position at a low-risk entry point

Exit Points: Establish firm stop loss points

Lets impose these onto the Crocs chart.

An uptrend begins.

Quarterly earnings increase.

A hot selling product.

And a low risk buy point.

Exit points will be discussed later.

Additionally, Mark provides a ranking process to arrive at a super performance stock:-

See below the Ranking template:-

There is far too much in the chapter to cover in this review, but don’t be too concerned, most of these requirements can be filtered through several online platforms.

The message however is simply to align positive fundamentals with immediate demand.

It is clear that Mark does not consider value to any meaningful degree, in fact the universal metric for measuring value, the PE ratio, is discussed and he points out that;

There is no magic P/E number.

There is no appropriate level when it comes to a P/E ratio and super performance stocks. The P/E can start out relatively low or high.

For example; The 25 top-performing stocks from 1995 to 2005 had an average P/E ratio of 33x, ranging from a low of 8.6x to a high of 223x.

Legendary value investor Benjamin Graham, himself, correlates a higher PE ratio to higher expected growth rates. As demonstrated here.

The suggestion from Mark however is to forget this PE value calculation and seek out companies with the greatest potential for earnings growth through other metrics.

Let’s move on…

This is where Mark really excels, Trend analysis and price action.

There are 4 stages, lets take a look at these in some detail as they are paramount to the foundation for the technical setups that Mark discusses:

· Stage 1 – The neglect Phase, also know as consolidation

Price moves in a sideways fashion with a lack of any sustained price movement up or down.

Price oscillates around its 200-day moving average. (This phase can last for months or even years.)

Volume will generally contract and be relatively light compared with the previous volume.

· Stage 2 – Advancing Phase: Accumulation

Possibly ignited by a promising business outlook, a new CEO, or a big earnings surprise that beats estimates.

Volume charts will show big up bars representing abnormally large volume on rallies, contrasted with lower volume on price pullbacks.

The Stock price is greater than the 200-day Moving Average.

And the price is in a clear uptrend, defined by higher highs and higher lows in a staircase pattern.

· Stage 3 – Topping Phase: Distribution

Volatility increases, with the stock moving back and forth in wider, looser swings.

There is usually a major price break in the stock on an increase in volume. Often it’s the largest one-day decline since the beginning of the stage 2 advance. On a weekly chart, the stock may put in the largest weekly decline since the beginning of the move. These price breaks almost always occur on overwhelming volume.

The stock price may undercut its 200-day MA.

And the 200-day MA will lose upside momentum, flatten out, and then roll over into a downtrend.

· Stage 4 – The Declining Phase: or….Capitulation

At some point there will be a negative surprise. The company will miss an earnings estimate or pre-announce earnings.

The vast majority of the price action is below the 200-day moving average.

The 200-day MA which was flat or turning downward in stage 3, is now in a definite downtrend.

The Stock price pattern is characterized as a series of lower lows and lower highs, stair-stepping downward.

Lets merge all these 4 stages together, with a typical (simplified) transition between each.

To clarify, stock selections will only be considered by Mark in the stage two growth area.

So, having put strong fundamentals together with the right phase of a stocks trend, at which point (within this stage two growth phase) does Mark buy a stock?

Mark suggests buying at what he calls the pivot point.

Mark frequently refers to the Cup and Handle chart pattern to identify the pivot point:-

Before purchase there is generally a forming of what Mark calls the pivot buy point. Specifically, the point at which you want to buy is when the stock moves above the pivot point on expanding volume.

In this cup and handle diagram the pivot point can been seen here…

Also note how the breakout through the pivot point accompanied an increase in volume…

Every correct pivot point should also develop with a contraction in volume, as seen here…

Often to a level well below average, with at least one day when volume contracts very significantly.

The pivot buy point itself should be somewhere within this breakout candle…

Mark suggests that the cup, or basing phase should be a minimum of 3 weeks and can be anything up to 65 weeks.

Notice how after the cup formation completes, a flattening or slight retracement occurs to form the handle, this becomes the forming of the pivot point area prior to the breakout.

Ok, so we have our buy point… how does Mark suggest we manage risk?

This leads us onto the exceptionally important (and often neglected) topic of risk management.

Lets use the same cup and handle diagram to demonstrate risk management, in this instance; the stop loss…

Mark suggests setting a maximum downside loss limit.

· By setting an absolute maximum loss of no more than 10% on the downside

· The average loss should be much less, maybe 6 or 7% over the long term.

· In this example it is more likely that the stop loss would be positioned here…. Close to the handle structure, and more aligned to a longer term stop loss average of 6 to 7%

· If you are wrong on the purchase with a 10% cushion for normal price fluctuation, either the selection criteria or timing is flawed or the overall market is hostile and you should be out of stocks. But remember, it is ok to be wrong.

Mark says;

“you can’t control the number of wins and losses. What you can control is your stop loss; you can tighten it up as your gains get squeezed during difficult periods. I like to keep my risk/reward ratio intact so that I can have a relatively low batting average and still not get into serious trouble. It’s a concept that I call building in failure”.

Mark emphasises the importance of capping losses, he points out that he would have been knocked out of a few of his winners; but, this action was overwhelmed by the loss-cutting effect… Instead of having a double-digit percentage loss in his portfolio, he would have had a gain of more than 70%!

Spend a few moments (perhaps pausing) looking at this asymmetric chart to see how capping losses impact your overall trading performance.

Notice how a 10% loss would require only an 11% gain to recover, whereas a 50% loss would require a 100% gain to recover.

Mark also says that the stop can be moved up when the stock rises by 2 or 3 times the initial risk, and profits should be locked in when the trend changes. This is quite often referred to as the trailing stop loss.

Lets see how this may look on the example chart here…

We will assume that the initial trade risk was £1000.

20 weeks later the price increases to show a £2000 profit.

Mark would then raise his initial stop loss to a level where it would lock in a profit, arguably to a near support level, and where the price would have likely breached the 200 MA level.

We can therefore assume that the 1st raised stop would be moved to this level. Also locking in a £1000 profit.

Repeat this for the 2nd raised stop loss, and so on until the trend shows signs that it has changed.

As we previously discussed, a change in trend direction (also known as topping) can be seen with this large price drop which closed below the 200 day moving average. You would certainly want to exit the trade here if your raised stops had not already done so.

So, we covered what to buy, when to buy and when to sell, but how many stocks does Mark suggest holding at any one time?

Mark suggests, (Depending on our risk tolerance) you should typically have between 4 and 6 stocks, and for large portfolios maybe as many as 10 or 12 stocks. This should provide sufficient diversification but not too much.

He states, Super performance will generally not be achieved by an overly diversified portfolio.

Look at the scale presented here to determine how many stocks you should hold based on your own individual risk profile.

So what have we learnt from this book review….

1) We have a credible author who has walked the walk

2) Make sure the stock is within an upward trend (but not the topping phase)

3)We want to see an improvement in earnings, perhaps a catalyst in the form of a new product or contract.

4)We need a low risk entry point. Ideally around the structure of the handle within the cup and handle pattern.

5)We need a definitive stop loss set at no more than 10% to ensure losses do not snowball – Remember, we do not need to be right every time, the key is to win more when we are right and lose less when we are wrong.

6) Sell when the price trend turns down

7)Valuation metrics are not necessary.

8)Don’t over diversify, consolidate with only the very best set-ups.

9)Compound those returns!

There we have it, an overview of how Mark Minervini achieved annual returns in excess of an astounding 220%.

I highly recommend purchasing the book, as such, we give this a 5 star rating.

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1 Comment

Real Talks
Real Talks
Mar 27, 2022

excellent, Keep up the good work

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