How Mark Minervini won the US Investing Championship
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Hi everyone, in this video we look at a popular trading strategy labelled as the Powerplay Setup. The strategy is a term coined by one of the most successful traders on the planet, two-time US investing champion Mark Minervini. We have covered Mark in previous videos, but today we keep it specific to this particular set-up, a set-up that offers the potential for big returns.
Before we look at the set-up specifics, lets first look at Mark’s most recent performance in the US championships. In 2021 he finished 1st for the second time, yielding a return of 334.8% in just one year, having participated in the one million plus division.
Mark has a few strategy variations to achieve such returns, but his principles remain consistent across all the approaches he shares. Trend, consolidation, breakout, volume, and good risk management form the foundation of all his strategies. Mark summarizes his approach when he said:
“I stuck with the same style and strategy for so many years that I got really good at doing that one thing. I was doing the same exact thing I’m doing now, looking for stocks that are in strong uptrends that are coming out of consolidations”.
The strategy I use is based on a similar concept to Mark, and to celebrate our recent milestone of reaching 100,000 subscribers, I too have entered into the same US investing championship for 2023. For those interested, you can follow all my trades in the competition by using the links below and subscribing to the channel.
Let’s look at Mark’s powerplay setup.
The setup has similarities to the high tight flag, popularized by William O’ Niel, the man responsible for formulating the CANSLIM trading strategy. A recent study spanning ten years put the flag pattern in the top ten chart patterns, with a success rate greater than 67%.
Like many successful patterns, the flag pattern begins with a strong prior uptrend, followed by a period of stagnation or consolidation. This forms a flag like channel also referred to as a volatility contraction, a period where price digests the supply built up from the prior upward move, whilst tightening and preparing itself for the next move. This of course is a simplistic example, let’s look at Marks template for a more practical understanding.
The first parameter is the need to have a strong underlying demand for the stock, this demand is easily identified by a strong uptrend in price, and although counterintuitive, the best moves often come after a large rise in price from significant demand.
Many investors think that after such a move, prices are overbought and are due a correction, but this is often a classic example of buying high and selling even higher, astute traders recognize this momentum and take advantage of it.
The next requirement is the Volatility Contraction Pattern, which forms after an increase in demand. The pattern can occur in any timeframe, and will often start with some profit taking, followed by more demand and a return to the high, and then another less pronounced pull back. We see it again here which provides a series of higher lows, thereby creating a rising support line in the process.
We can now clearly see the volatility contraction as price is squeezed under a level of resistance. Just as the price is being squeezed with less volatility, we also want to see volume drying up, which is evident as we reach the end of the pattern. The drying up of volume is a lack of supply and often precedes a pocket pivot, more commonly known as a breakout, its where volume and price action become a particular focus.
Ideally the next stage would look like this, a breakout through resistance at the pivot, with considerable volume. A breakout without a significant increase in volume should be left alone. A previous video on volume and price action, provides a more in-depth discussion on the subject.
Having identified the buy point at the break, we now need to consider the stop loss position, and although there is some subjectivity on its placement, It would likely be placed just below the pivot, perhaps here underneath the wick of the previous candle. We can now determine the risk portion of the position.
If we look further out, we can get a feel for the potential. We saw the contraction of volatility through higher lows, a dry up of volume, a breakthrough of resistance, with increased volume, and our defined risk. The continuation of demand saw the risk reward ratio equate to 1 to 6 on the chart, a promising key metric for any strategy.
A volatility contraction can appear in many forms, some will be short, some longer, and some shallow in a more lateral form. The key word regardless of our interpretation is consolidation, we need to see a tightening of price, which effectively acts like a coiled spring, building pressure and acting as a catalyst for the next move.
The theory suggests that expansion is followed buy contraction, and contraction followed by expansion, that’s why you will often see these patterns play out in the charts. This contraction offers logical rationale to place a trade with low risk, and is the foundation of almost all legendary trader strategies. The hidden component which I discuss in other videos, is that with a high probability low risk set-up, you can use sensible leverage to really enhance returns, which is exactly how Mark was able to achieve more than a 300% return.
Let’s look at past traders and their varying approach to the market, although based on the same principles.
Starting with Nicolas Darvas, famous for what is known as the box method, he looked for rising prices followed by a lateral consolidation, with a breakout showing increased volume.
One of the most notorious traders Jesse Livermore also looked for periods of consolidation, classing them as pivot points, often found after periods of expansion and contraction. He would trade them in the direction of the previous move and would expect a continuation thereafter.
Another well known trader Dan Zanger trades the breakout from a basing pattern, with the moving averages in his favour and conviction through increased volume. He also looks for a tight stop loss to allow for the leveraging of returns.
A modern era trading millionaire, Kristjan Qullamaggie, again uses the same principles, prior demand, consolidation, tight stop losses and support from the moving averages.
Three time US investing champion, David Ryan, looks for periods of consolidation, using patterns like the cup and handle, and volatility contraction patterns within an uptrend.
Legend Stan Weinstein analyses the weekly chart, looking for periods of consolidation, breakouts showing volume, and looking at the moving averages to stay with the trend.
Regardless of the trader, the timeframe, or even the asset, the principles remain constant, noticeable demand, a form of consolidation, a breakout of resistance with an increase in volume, and a low risk entry point to gain a positive risk reward, whilst also allowing for leveraged returns.
Mark recently posted a Dow Jones chart dating back to 1903 highlighting that the theory has been around for more than a century. It shows the same volatility contraction pattern, followed by a breakout on volume, whilst being supported by a moving average.
My approach is built on similar theory, I look for lateral consolidation as part of the contraction phase, followed by a breakout. It’s a theory I will use in the US championship.
For those interested in looking for set-ups based on my theory, we have created a bespoke scanner to filter a shortlist of potential stocks to trade. We can determine the consolidation width, and breakout size amongst other aspects. The scanner currently works on the weekly chart only, but we do intend to add daily charts in the future.
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