Saturday, April 1, 2017
Friday, March 4, 2016
A better way to trade the IBD/CANSLIM Method
If you found this post likely you have a good understanding of the CANSLIM method already. If not go read How to Make Money in Stocks by William O'Neil. An older version is probably available at your local library. The fundamental analysis of the system I think still has value, but the technical analysis and buy points they suggest are not the best method for many, particularly those who work full-time and trade on the side.
I have always liked the premise behind the CANSLIM methodology, but I could never find a way to make it work with my busy day to day life. The problem is they want you to buy breakouts. Breakouts happen most of the time during the day. This creates a conundrum for the average working person. How can you monitor the market all day to buy at the correct buy point? I know modern brokers provide some amazing trading apps, and you can set alerts, etc. However, if you take your job seriously there will be times when you cannot stop and enter a trade. Another alternative some people use to get around this is to use conditional orders. Doing this you can set a market or limit order to be triggered only if the price is greater than a certain level. So if you think the ideal buy point of the breakout would be $20.20, you can set a conditional that would place a market order for the stock once it trades above that level. The only problem is volume is not taken into account. Often times in the middle of the day stocks can have very erratic behavior and you could easily buy at the high of the day with this strategy.
Another problem is that there are so many breakout traders that we see an overwhelming number of breakouts fail these days. I can get data on this if anyone is interested, but do not take my word for it. Look through past charts yourself and you will see countless breakouts that failed. Many of them eventually go on to new highs, but it would depend on your stop loss system whether or not you would still be in the stock or not at that point.
So what is the better method? In my opinion, pullbacks are the way to go. How you define a pullback can vary greatly. I have a few indicators that i use, but my favorite is probably very long term trend lines, if possible. A stock in a newer trend, which is of course a preferred stock to be in may not have a super long term trend line. Use the longest trend line possible. A pullback to a long term trend line on a high rated IBD stock is my favorite buy signal, but I prefer to see multiple technicals line up. I use Bollinger Bands, RSI, horizontal trend lines, and something I got from Jesse Stine in Insider Buy Superstocks called the "magic line". These are my most used indicators, but I do have a few others. Have a look at some of the information presented in Adam Grimes' Free Trading Course, as well as his blog. There he goes through many indicators and that is where I settled on many of the ones I use. He has done extensive backtesting of what works and does not work. It is a laborious effort to get through, but very well worth the effort if you are serious. Another great resource for learning a pullback methodology is Dave Landry and his book The Layman's Guide to Trading Stocks.
I will post more information on my pullback methodology in a future blog post, but the basic idea is a determine a very solid support level using all of the aforementioned techniques. I place a limit order at or sometimes below that level(price will often shoot through a support, faking many people out and then resuming its long term uptrend briefly after that). After I am in a trade I will set my stops, but I do not enter them in to my broker, they are written down as I prefer End of Day stops. During a trading day in todays environment there is a lot of noise intraday that can wreak havoc on retail traders stops. I prefer to not have my stop order sitting out there for this reason. I will detail my stop methodology at a future date as well.
Hopefully this gives you some insight in how to modify CANSLIM for the working person. Feel free to ask me questions.
I have always liked the premise behind the CANSLIM methodology, but I could never find a way to make it work with my busy day to day life. The problem is they want you to buy breakouts. Breakouts happen most of the time during the day. This creates a conundrum for the average working person. How can you monitor the market all day to buy at the correct buy point? I know modern brokers provide some amazing trading apps, and you can set alerts, etc. However, if you take your job seriously there will be times when you cannot stop and enter a trade. Another alternative some people use to get around this is to use conditional orders. Doing this you can set a market or limit order to be triggered only if the price is greater than a certain level. So if you think the ideal buy point of the breakout would be $20.20, you can set a conditional that would place a market order for the stock once it trades above that level. The only problem is volume is not taken into account. Often times in the middle of the day stocks can have very erratic behavior and you could easily buy at the high of the day with this strategy.
Another problem is that there are so many breakout traders that we see an overwhelming number of breakouts fail these days. I can get data on this if anyone is interested, but do not take my word for it. Look through past charts yourself and you will see countless breakouts that failed. Many of them eventually go on to new highs, but it would depend on your stop loss system whether or not you would still be in the stock or not at that point.
So what is the better method? In my opinion, pullbacks are the way to go. How you define a pullback can vary greatly. I have a few indicators that i use, but my favorite is probably very long term trend lines, if possible. A stock in a newer trend, which is of course a preferred stock to be in may not have a super long term trend line. Use the longest trend line possible. A pullback to a long term trend line on a high rated IBD stock is my favorite buy signal, but I prefer to see multiple technicals line up. I use Bollinger Bands, RSI, horizontal trend lines, and something I got from Jesse Stine in Insider Buy Superstocks called the "magic line". These are my most used indicators, but I do have a few others. Have a look at some of the information presented in Adam Grimes' Free Trading Course, as well as his blog. There he goes through many indicators and that is where I settled on many of the ones I use. He has done extensive backtesting of what works and does not work. It is a laborious effort to get through, but very well worth the effort if you are serious. Another great resource for learning a pullback methodology is Dave Landry and his book The Layman's Guide to Trading Stocks.
I will post more information on my pullback methodology in a future blog post, but the basic idea is a determine a very solid support level using all of the aforementioned techniques. I place a limit order at or sometimes below that level(price will often shoot through a support, faking many people out and then resuming its long term uptrend briefly after that). After I am in a trade I will set my stops, but I do not enter them in to my broker, they are written down as I prefer End of Day stops. During a trading day in todays environment there is a lot of noise intraday that can wreak havoc on retail traders stops. I prefer to not have my stop order sitting out there for this reason. I will detail my stop methodology at a future date as well.
Hopefully this gives you some insight in how to modify CANSLIM for the working person. Feel free to ask me questions.
A layman's guide to managing your workplace retirement accounts. Part 2 Introduction.
Whether it is a 401k, pension, 403b or any other moniker often times workplace retirement accounts are very limited. They have a small universe of funds and often a large percentage of the funds underperform. There are usually strict transfer rules on many of the funds, wherein if you transfer out of a fund you cannot transfer back in for 30 days.
These limitations limit performance, but the real problem lies in the fact that most people have absolutely no strategy regarding how they will manage these accounts. The problem stems from the severe lack of personal finance education in our education system as well as in our workplace environment. The education that is provided is not typically the most sound advice, in my opinion. Often times you will hear from an "expert" who will essentially tell you that you should always be fully invested into one of the fund options provided. Be it a target retirement fund, a mid/large/small cap growth and or value fund(I will expand on these terms), an emerging markets fund, etc.
Often times the retirement account website will have an automated system that will help you to allocate your retirement savings into funds based on your risk tolerance, age, target retirement date etc. If you say you are very young and what to be very aggressive the system may choose for you to be in a high percentage of small cap growth and/or emerging markets funds. While they are correct that these types of stocks can provide the best growth over long periods of time, it does not mean that the individual funds selected will be able to perform on par or better than the major indexes underlying these particular asset classes.
I will expand on how to choose a fund in your retirement account in a future blog post. First I want to get to the real issue that I think can vastly change the performance of your retirement account over the very long term. Fund selection is not nearly as important as the ability to know when to sell out of the fund you have chosen and go to a money market or fixed income option. Often times this is labeled as the least aggressive option. It is essentially a savings account. It often pays a decent interest rate, but more importantly it provides protection from equities when the market reaches key inflection points that CAN supersede major market downturns.
These inflection points do not happen often, and the are often times false alarms meaning you will transfer to your money market account and the market will end its correction without have a major crash and you will get back into your chosen mutual funds. These false alarms often times not do have much effect on your account. If you had stayed in your fund and/or sold and reentered you would not likely see a major difference in your returns over that time period. Where you will see a difference is when you can avoid the major bear markets such as the one we saw in 2008.
I will expand on the process for spotting the major trend changes, or inflection points in Part 2. Keep in mind there is absolutely no strategy that is right 100% of the time. In fact most strategies are not right 60% of the time. It is the rules of the strategy that matter more than the times it is right. In fact this strategy is "wrong" often. But if you read carefully you will have noticed that when it is wrong it often times is not detrimental to you account. If it is it will likely be fairly minor in the very long term. Remember that this strategy is for those thinking very long term. If you are close to retirement I would not recommend you follow this strategy. Ideally if you are close to retirement you should be in less volatile investments and not stock mutual funds.
Check out part 2 for the market timing part of the strategy.
These limitations limit performance, but the real problem lies in the fact that most people have absolutely no strategy regarding how they will manage these accounts. The problem stems from the severe lack of personal finance education in our education system as well as in our workplace environment. The education that is provided is not typically the most sound advice, in my opinion. Often times you will hear from an "expert" who will essentially tell you that you should always be fully invested into one of the fund options provided. Be it a target retirement fund, a mid/large/small cap growth and or value fund(I will expand on these terms), an emerging markets fund, etc.
Often times the retirement account website will have an automated system that will help you to allocate your retirement savings into funds based on your risk tolerance, age, target retirement date etc. If you say you are very young and what to be very aggressive the system may choose for you to be in a high percentage of small cap growth and/or emerging markets funds. While they are correct that these types of stocks can provide the best growth over long periods of time, it does not mean that the individual funds selected will be able to perform on par or better than the major indexes underlying these particular asset classes.
I will expand on how to choose a fund in your retirement account in a future blog post. First I want to get to the real issue that I think can vastly change the performance of your retirement account over the very long term. Fund selection is not nearly as important as the ability to know when to sell out of the fund you have chosen and go to a money market or fixed income option. Often times this is labeled as the least aggressive option. It is essentially a savings account. It often pays a decent interest rate, but more importantly it provides protection from equities when the market reaches key inflection points that CAN supersede major market downturns.
These inflection points do not happen often, and the are often times false alarms meaning you will transfer to your money market account and the market will end its correction without have a major crash and you will get back into your chosen mutual funds. These false alarms often times not do have much effect on your account. If you had stayed in your fund and/or sold and reentered you would not likely see a major difference in your returns over that time period. Where you will see a difference is when you can avoid the major bear markets such as the one we saw in 2008.
I will expand on the process for spotting the major trend changes, or inflection points in Part 2. Keep in mind there is absolutely no strategy that is right 100% of the time. In fact most strategies are not right 60% of the time. It is the rules of the strategy that matter more than the times it is right. In fact this strategy is "wrong" often. But if you read carefully you will have noticed that when it is wrong it often times is not detrimental to you account. If it is it will likely be fairly minor in the very long term. Remember that this strategy is for those thinking very long term. If you are close to retirement I would not recommend you follow this strategy. Ideally if you are close to retirement you should be in less volatile investments and not stock mutual funds.
Check out part 2 for the market timing part of the strategy.
A layman's guide to managing your workplace retirement accounts. Part 1 Terms and Definitions.
I am going to list some terms that I will use when I talk about my retirement account strategy. I am attempting to write this guide for people at all levels of market knowledge so many of these terms will be very basic for advanced readers. The definitions come from Investopedia.com.
Read more: Index Definition | Investopedia http://www.investopedia.com/terms/i/index.asp#ixzz3jfJ7gFMf
Frequently referred to as "market cap."
DEFINITION of 'Index'
A statistical measure of change in an economy or a securities market. In the case of financial markets, an index is an imaginary portfolio of securities representing a particular market or a portion of it. Each index has its own calculation methodology and is usually expressed in terms of a change from a base value. Thus, the percentage change is more important than the actual numeric value. Stock and bond market indexes are used to construct index mutual funds and exchange-traded funds (ETFs) whose portfolios mirror the components of the index.Read more: Index Definition | Investopedia http://www.investopedia.com/terms/i/index.asp#ixzz3jfJ7gFMf
DEFINITION of 'Market Capitalization'
The total dollar market value of all of a company's outstanding shares. Market capitalization is calculated by multiplying a company's shares outstanding by the current market price of one share. The investment community uses this figure to determine a company's size, as opposed to sales or total asset figures.Frequently referred to as "market cap."
Subscribe to:
Posts (Atom)