MomentumMasters

MomentumMastersARoundtableInterviewwithSuperTraders

MarkMinervini,DanZanger,DavidRyan,andMarkRitchieII

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Copyright©2015byMarkMinervini.Allrightsreserved.

This book, or parts thereof,may not be produced in any formwithout permission from thepublisher; exceptions aremade for excerpts used in printed reviews andothermedia-relatedmaterialsaslongasproperattributionismade.

The publisher and the authors make no representations or warranties with respect to theaccuracyorcompletenessofthecontentsofthisworkandspecificallydisclaimallwarranties,includingwithoutlimitationwarrantiesoffitnessforaparticularpurpose.Nowarrantymaybecreated or extended by sales or promotional materials. The advice and strategies containedhereinmaynotbesuitableforreaders’situations.Readersshouldconsultwithaprofessionalwhereappropriate.Neitherthepublishernortheauthorshallbeliableforanylossofprofitoranyothercommercialdamages,includingbutnotlimitedtospecial,incidental,consequential,orotherdamages.

ISBN978-0-9963079-0-1(pbk)

ISBN978-0-9963079-1-8(ebk)

PrintedintheUnitedStatesofAmerica

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Contents

TheWhyandHowofThisBookMeettheMomentumMastersSECTIONONEIntroductionSECTIONTWOStockSelectionSECTIONTHREEPositionSizingSECTIONFOURTechnicalAnalysisSECTIONFIVEFundamentalsSECTIONSIXGeneralMarketSECTIONSevenEntryCriteriaSECTIONEIGHTRiskManagementSECTIONNINETradeManagement

SECTIONTENPsychologySECTIONELEVENFinalThoughts

TheWhyandHowofThisBook

Throughout his career, Mark Minervini has been approached by countlesstraders,fromnovicestoveterans,withquestionsabouthowtoachievesuccessinthestockmarket.ManyoftheseknowledgeseekerslearnedaboutMarkwhenhewon theU.S. InvestingChampionship in 1997, or laterwhen they read abouthiminJackSchwager’sbestsellingbookStockMarketWizards:InterviewswithAmerica’sTopStockTraders.Sincethen,Mark’stradingfamehasexplodedwiththe2013publicationofhis

first book, Trade Like a Stock Market Wizard: How to AchieveSuperperformance in Stocks (McGraw-Hill). A distillation of wisdom gainedfromMark’s 30 years of trading high-momentum stocks, Trade Like a StockMarket Wizard became an immediate bestseller among investment titles andsparked a huge following, including more than 100,000 Twitter followers.Three-timeU.S. InvestingChampionDavidRyandeclaredTradeLikeaStockMarket Wizard to be “the most comprehensive work I have ever read oninvestingingrowthstocks.”Despiteitsdepthandbreadth,TradeLikeaStockMarketWizardstokedrather

than satiated traders’ hunger for knowledge. In the two years following thebook’spublication,readersfloodedtheofficeofMinerviniPrivateAccesswithnearlyathousandquestions.Somequeriesdelvedfurtherintotopicscoveredinthe book, while others sought to explore new territory. It dawned on us thatMark’s readers—including many of you reading this now—had entrusted uswith a real treasure trove. Drawing on their own hard-earned tradingexperiences, readers collectively had furnished us with an incredibly detailedand wide-ranging inventory of the real-world challenges and knowledge gapsconfrontingtraders.We then asked a question of our own: How should we respond to this

windfall?IsuggestedtoMarkthatheanswermanyofthesequestionsinabook.

Markreplied,“Ihaveanevenbetter idea.Whydon’tweasksomeof thebeststocktradersIknowtoanswer thesequestionswithme?”Markreachedout tohis friends David Ryan, Dan Zanger, andMark Ritchie II, three of the mostsuccessfulstocktradersinAmerica.Theyenthusiasticallyagreedtoparticipate,andprojectMomentumMasterswasunderway.Momentum Masters takes a unique approach. We chose 130 of the most

relevantquestionssubmittedtoourofficeandorganizedthembycategoryintorelatedsections.Iwanttoemphasizethatthesequestionsweresubmittedbyrealtradersconfrontingrealissuesinthestockmarket.Therearenoquestionsbasedon our opinions or ideas ofwhat tradersmight be interested in knowing. Theformat ofMomentumMasters also parts company frommost trader interviewbooks in a fundamental way. Instead of dividing the interviews into separatechapters for eachmarketmaster,Mark,David,Dan, andMark II answer eachquestioninaroundtableformat,allowingthereadertocompareandcontrast.NowifImay,letmegiveyouaheads-upbeforeyoudivein.First, Momentum Masters offers no colorful biographical details, literary

flourishes,orotherdiversionswithwhichmanymarketbooks, includingsomeexcellentones, try to“spiceup”or lighten thematerial.Thisbook isallmeat;questionsandanswersallpertaintotrading.Second, as you read through the questions and answers, take note of the

differencesaswellasthecommoncharacteristicsamongthefourmasters.AsIsaid,theformatwaschosendeliberatelytofacilitatecomparisons.DavidRyan,a40-yeartradingveteran,andMarkMinervini,withmorethan30years’tradingexperience, favor fast-growing small- andmid-cap stocks. Dan Zanger, a 25-year trader, prefers the larger-cap stocks and even mega-cap names. MarkRitchieII,theyoungestofthegroup,wontheTriple-DigitChallengeatthefirstof theannualMarkMinerviniMasterTraderProgramworkshops in2010.Thechallenge was to become the first attendee to return 100% using what waslearned on his or her trading account. Ritchie II did it—achieving triple-digitperformance—in less than six months. During the subsequent five years,

Minervini has closely watched Ritchie deliver consistently superior tradingperformance.He toldme, “Ritchie is aMomentumMaster in themaking andshouldbeincludedinthisbook.”Tosucceedasastocktrader,youneedtolearnwhattobuy,whentobuy,and

whentosell.Moreimportantly,youwillneedtomatchyourowntradingstyletoyourpsychologyandstrengthsand learnhowto improveyourweaknesses.Asyoucompareandcontrasttheanswerstoeachquestion,keepasharpeyeforthefundamentalpracticesandcoreprinciplesthatthesetradersshare.ThesenuancesarethesimilaritiesbetweenhighlysuccessfulMomentumMasters.Through the diverse insights, acumen, and trading experiences of the four

masters, readers will attain an education in trading like none other—and allgroundedintheareasthatinterestthemmost.Sothereyouhaveit.Aplethoraofknowledge now awaits you. Good reading and best of success on your ownjourneytogreaterreturnswithlessrisk.

BobWeissmanEditor

MeettheMomentumMasters

MARKMINERVINIMark is theauthorof thebestsellingbookTradeLikeaStockMarketWizard:HowtoAchieveSuperperformanceinStocksinAnyMarket.Startingwithonlyafew thousand dollars,Mark turned his personal trading account intomillions,averaging220%peryearforfiveconsecutiveyearswithonlyonelosingquarter,achieving an incredible 36,000% total return. To put that in perspective, a$100,000accountwouldexplodetoover$30millioninjustfiveyears.TodemonstratethecapabilitiesofhisSEPA®methodology,in1997,Markput

up$250,000of his ownmoney and entered theU.S. InvestingChampionship.Trading against highly leveraged futures and options traders, Mark traded along-onlystockportfoliotowinthereal-moneyinvestmentderbywitha155%annual return, a performance that was nearly double the nearest competingmoneymanager.Mark is featured in JackSchwager’sStockMarketWizards: Interviewswith

America’s Top Stock Traders. Schwagerwrote: “Minervini’s performance hasbeennothingshortofastounding.Most tradersandmoneymanagerswouldbedelightedtohaveMinervini’sworstyear—a128percentgain—astheirbest.”Mark educates traders about his trading methodology through Minervini

Private Access, a streaming communication platform that allows users theuniqueexperienceoftradingsidebysidewithhiminrealtime.HealsoconductsaliveMasterTraderProgramworkshop,whereheteacheshissysteminatwo-dayweekendevent.YoucanlearnmoreaboutMarkatwww.minervini.com.

DAVIDRYANDavid is a protégé of the legendary William O’Neil and a former moneymanageratWilliamO’Neil&Co.Aftergraduatingcollegein1982,Davidwentto work for O’Neil’s company, and within four years, he was appointed the

youngest vice president and O’Neil’s direct assistant responsible for moneymanagementandstockselectionforthefirm’sinstitutionalclients.David won the U.S. Investing Championship three years in a row between

1985 and 1987. In 1985 hewas up 161% and in 1986 an almost an identical160%.Hereenteredthecontestin1987andwonforthethirdyearinarowwhenhe was up again over 100 percent. For the three years his total return was1,379%.David successfully ran amutual fund for 5 years and his own hedge fund,

RusticPartners,for15years.Hecontinuestoactivelytradehisowninvestmentaccount.DavidisfeaturedinJackSchwager’sMarketWizards:InterviewswithTopTraders.Schwagerwrote:“AlthoughmostofthetradersIinterviewhavealove for trading,nonehave theunbridledenthusiasmdemonstratedbyRyan. Isuspect that as long ashewas suppliedwithhis charts, hewouldprobablybecontenttoworkinahallcloset.”

DANZANGERDan is the chief technical analyst for the stock website chartpattern.com andauthoroftheTheZangerReportnewsletter.Duringthelate1990s,Danturned$10,775 into an audited gain of $18 million in just 18 months. That’s a164,000%return.As a formerpool contractor,Dan first gainedworldwide recognition for his

trading achievements in an article that appeared in Fortune Magazine inDecember 2000 entitled “My Stocks Are Up 10,000%!” Dan spent 25 yearsdevoting every spare moment to studying charts. Using chart patterns, Daneventually developed a robust trading system that responds to all marketconditions.DanwasvotedTop100TraderoftheYearbyTraderMonthlyMagazinetwo

yearsinarow.HehasbeenfeaturedinsuchpublicationsasBarron’s,Forbes,Fortune,ActiveTrader,TraderMonthly,andTradersWorld aswell asbeenaguest on many radio and TV shows. He has been a frequent contributor to

Technical Analysis of Stocks & Commodities magazine and SFO magazine.FortunemagazinereferredtoDan’scockpittradingstyleas“arockkeyboardistsurroundedbysynthesizers.”

MARKRITCHIEIIMark is the sonof thewell-knownMarkRitchie (MarketWizards,God in thePits,andMyTradingBible).Although a relative newcomer to the investmentworld,Ritchie II isapotentaddition to theMomentumMastersall-star lineup.He achieved a 100% return in less than sixmonths to winMarkMinervini’s2010Triple-DigitChallenge.Sincethen,Ritchie’saccountisup540%;in2014alone,hewasup110%.Histotalreturnsince2010hasexceeded1,000%RitchieIImanagesapoolofhisowncapitaltogetherwithfriendsandfamily

through RTM2, LLC. He has a degree in philosophy from Illinois State andcurrentlyresidesintheChicagosuburbswithhiswifeandfivechildren.

SECTIONONE

Introduction

S1-1:Eachofyouhasbeentradingforalongtime.Doyoutradethesamewayandrelyonthesamechartpatternsthatyoudidearlierinyourcareer?Orhavetimeschangedandsohasyourtradingstyleaccordingly?Minervini: I’ve refined things a bit and added some new techniques, but95%isunchanged.That’s thebeautyofsupplyanddemand; it’s timeless.Theonly thing I do more of is trade pullback setups, and that’s just because Ideveloped new pullback buy techniques and got better at it. But my tradingapproachhasremainedvirtuallyunchangedforoverthreedecades.Ryan:Yes,IamstillbuyingthesamechartpatternsIdidwhenIfirststarted.Ihaveaddedafewnuancestomytradingstyle.WhileIstillbuybreakouts,Ialsobuy pullbacks in strong stocks. Earlier inmy career I only bought breakouts.Thesedaysmanystocksbreakout,pullback,thenstartamovehigher.Zanger: The same chart patterns that are in themarket todaywere evident100yearsago,andIsuspecttheywillbehereformanymoreyearstocome.So,yes,ItradethesamewaytodayasIdid20yearsago,andIthinkit’ssafetosayIwillbetradingthesameway20yearsfromnow.IwillsaythatI’mfarbetteratcashingoutofstocksbeforeamarketbreaksorasignificantdowndraftoccursthanIwas5yearsago.Ritchie II: Well, I can’t comment on the nature of major changes to mytradingfrommanyyearsago,asIhaven’tbeenaroundfordecadesastheseotherfellowshavebeen.ButIwillsaythatItrackmytradesasdiligentlyasIfollowcharts,soIcanseetrendsinmytrading.WhatIcantellyouisthatI’vecertainlynoticed that there are often different technical themes within certain marketperiods.Forexample,latelyithasbeenverydifficulttobuynew52-weekorall-time-high–typebreakouts,whereasothertimesithasbeenmucheasier.Someof

this undoubtedly has to dowithwherewe’re at in the overall cycle and howobviousormorefailurepronesometypesofbreakoutscanbecome.

S1-2:Whataboutyourdailyroutine—hasitchangedorevolvedovertime?Minervini:Likemytrading techniques,myroutine is relativelyunchangedaswell.Mostofmyworkisdonethenightbefore,sowhenthemarketopens,IalreadyknowthestocksI’minterestedinandatwhatpricelevels.Igetinfrontofmy trading screen at 8:30 a.m.ET.The first thing I do is look at earningsreleased and news items that may affect my holdings, and I also look atpremarketfuturestogetanideaofhowthemarketwillopen.Ithenreviewallmycurrentholdingsandupdatemystopsandsetalerts;Isetaudioalertsonmybuycandidates at price levelsnearmy targetpurchaseprice andalso at levelsnearmysellstops.EverythingIdois thoughtout; Idon’t likesurprises,soI try toworkoutas

muchaspossibleinadvancesoIdon’tgetblindsidedandcaughtoffguard.Idothisworkoutsideofmarkethourstoremoveemotion.Whentradinginrealtime,things can get very emotional, so themore you canwork out in advance, theeasier itwill be to take actionwhen under fire.The only thing different fromwhenIfirststartedisthecomputer,whichIdidn’thave30yearsago;Iplottedchartsbyhandongraphpaper,ifyoucanimaginethat.Ryan:Mydailyroutineconsistsofgettingupanhourbeforethemarketopens(I am on theWest Coast, so it’s hard to get up much earlier). I spend timereading the Bible to get my perspective and to keep focus on what is reallyimportant. I then go over the news on themarket and specific stocks. I havealready prepared awatch list and set alerts the previous day after the close. Iusuallydon’tdomuchinthefirst45minutesoftradingbecausetherearemanyfalsemovesandreactionstoovernightnews.Zanger:Mydailyroutineisthesamenowasitwas25yearsago.IstartthedayoffwatchingthepremarkettickertapeonCNBCwiththesoundoffandget

afeelforthestockscrossingthetape.ThenItakealookatstockfuturesandgetsomecoffeebrewingandturnonthemonitors.IfireupmyIQXP.comSoundsoftheMarketprogramIhadwritten15yearsagoandliterallyhearwhichstocksarepoppingonthebidortheask.Assoonasthemarketopens,Iwant toseehowstocksaremoving;arethey

gappingupwithnovolume,inwhichcasetheywilllikelyselldownrightaway.Or are they gapping down on light volume, in which case it’s a buyingopportunitytoaddtosomepositions.Gappingupordownonheavyvolumetellsmetheyarelikelytoextendfromthere.RitchieII:My routine basically breaks down into two categories: (1) pre-tradingandpost-trading,whichconsistsofabouttwohoursbeforeandaftereachtradingday,and(2)thetradingdayitself.Thepre-trading–post-tradingroutineissimilar towatchingagame filmbefore thegame.Oneofmy football coachesusedtoalwaystellme,“You’vegottoreadandknowyourkeyssothespeedofthegameslowsdown,whichtakesyoutowheretheactionisratherthanchasingitdownfrombehind.”That’swhatmypre-trading–post-tradingroutinedoesforme.IknowwhatandwhereI’mgoingtobuybeforethemarketopens,sothereare

nosurprises,andIjustactwithoutthinking.Istartinthemorningbycheckingallmyopenpositions.ThenIcheckwherethegeneralmarketistradingaswellastheU.S.bondfutures.IreviewmywatchlistandsetalarmsonanystocksthatIbelieveareactionable.Fromthatlist,IdetermineifthereareanystocksthatIactually may purchase, and I calculate exactly how many shares I would bebuying.ThroughoutthedayIwatchallthestocksonmywatchlistaswellastheS&P

andU.S.bondfutures. If it’saparticularlyslowdaywhereIdon’thavemanyprospective buys, I will often look at other charts or do market research onanythingthatinterestsme.I’malwaysacontinuingstudentofthemarkets.Afterthemarketcloses,Irunthroughdailyscreensofanywherefrom200to

500 charts of individual stocks to compile a series ofwatch lists. I then lookthroughmywatchlistsaswellasscreenforactionableideas.Ialsologanyandalltradesfromtheprevioustradingdayinastrategy-specificmanner.

S1-3:Howdoyoufeelabouthigh-frequencytrading(HFT)?Minervini:I thinkit’sabsurdthatthispracticeisallowed,anditshouldbeaddressedmore seriously. TheU.S. stockmarket needs to be a fair and evenplaying field.HFT isa step in thewrongdirection. It’sa loophole thatallowsfront-running.Ryan: I don’t like it at all.AsMark said and as described in a60Minutesbroadcast in 2014, high-frequency trading is front-running,which is illegal. Italsotendstocreatealotofnoiseandfalsemoves.Iwouldn’tmindifthestockexchanges brought back the uptick rule and even specialists to keep a muchmore orderly market. Even with all the noise, stocks still move higher onearningsortheexpectationofhigherearnings.Zanger:IhavefoundthatsinceHFTenteredthepicturein2001,thereisalotmorechoppinessduringtheday,whichIbelieveisdesignedtoshakeusoutofourstocks.TheintroductionofdecimalsfromeighthshasallowedHFTtocomeon strong since the spread is so narrow now. Combine these high-frequencyalgorithms with rapidly evolving artificial intelligence that only gets moresophisticatedandsubtlewith time;wehuman tradersmustaccept it andadaptaccordingly.Forinstance,bybuyingintradayweaknessandusingfastertimeframessuch

asthree-orfive-minutecharts.Oralternatively,youcanend-runthewholeHFTquagmirebybuyingbreakoutsfromsolidbasesandlettingthosewinnersrunforafewmonths.HFTislargelyirrelevantthen.Onaclosingnoteaboutvolatilityandchoppiness,wecan’tcompletelyblame

HFT.Theadventofonlinestock tradingbrought in tensof thousandsof retailtraders buying and selling with great frequency that added to the energy andsensitivityof themarketplace.And let’snot forget thee-mini futurescontracts

thatbeganinOctober1997.Inmyopinionthisreallystartedsomeofthewildestswingsin themarketbecausethisnewe-minicontractbrought in thousandsofnewlyminted traders trying their hand at futures tied to theS&P500. It goeswithoutsaying that theeasyaccessaffordedbyonline tradingplatformswasafundamentalshiftthataidedthevolatility.RitchieII:Ihavemanystrongopinionsonthissubject,thefirstofwhichisthatHFThasneverbeenadequatelydefinedandoughttobe.Wecannothaveawell-informedunderstandingordebateaboutituntilit’swelldefined;andmanyinoppositiontoHFTdon’thaveagoodworkingdefinitionofwhatitistheyareopposing.Forexample,theheadofoneofthelargestequityexchangesgotcaughtinan

argumenton televisionsaying thathis firmmatched tradesusingdirectmarketfeeds,wheninfact thefirmdidn’t.Theexchangespokespeople tried todefusethesituationlater,buttheheadguyeitherliedordidn’tknowhowtradesonhisownexchangewerebeingprocessed,and themediaandregulatorsgavehimapasswithnofollow-up...nothing.Thatsaid,itismybelief—andIthinkithasbeenfairlywelldocumented—that

therearecertainpracticesintheHFTworldthatarelegalyethighlyunethical.For example, in the old days of the trading floors and pits, if you went andlookedataclerkorrunner’sorderandthenoutranhimtothepitinordertobidthemarketupordowninanticipationofthoseorders,youwouldbethrownoffthefloor,fined,orworse.Likewise,ifyoutriedtobullythemarketbyjamminghugesizesontheoffer

or bid, you couldn’t then step out of the way if someone yelled “Sold”; youcouldn’tthenturnaroundandsay“Oh,Ichangedmysizefrom1,000to10”asyouwereyelling“Sold.”However,inbothcasesthisispreciselywhatwehavetaking place today in many of our equity and futures exchanges. Themarketoughttobeamechanismforfairandorderlypricediscovery,andmanyofthegamesthatsomeofthesefirmsareplayingunderminetheveryspiritofwhatthe

marketsareherefor.

S1-4:Howdidyouoriginallygetintotrading;whatwastheattraction?Andwhathaskeptyoumotivatedovertheyears?Minervini:IoriginallygotinterestedintradingbecauseIgrewuppoorandIwanted to get rich. I saw the market as the ultimate opportunity for richeswithoutprejudices—it’s justyouand themarket—and ifyou’regood,yougetrich.AlthoughonceIstartedtrading,thechallengebecamemoreintriguingthanthemoney;themoneybecamejustawaytokeepscore.IwouldprobablystillbetradingtodayevenifIhadnotbecomewealthyfromit.Isimplylovetheartofspeculation; I don’t seemyself walking away from trading regardless of howmuchmoneyIhavemadeorwillmakeinthefuture.More recently, teaching my approach to others and hearing their success

stories is really gratifying, and it motivates me to continue sharing my ownknowledge.Interestingly,about26yearsagoIwenttoseeDavidRyanspeakata seminar, and now he’s herewithme in a book, andwe alsowork togetherinstructingatseminars.MarkRitchieIIcametomyworkshopin2010,andhereheisasayoungsuccessfultradersharinghisinsightswithus.Ryan:MydadstartedbuyingstocksformeformycollegeeducationwhenIstartedelementaryschool.Atthedinnertablehewoulddiscusswhyheboughtdifferentcompanies.Iboughtmyfirststockatage13inacandycompanycalledWardsFoods,whichmadeBitO’HoneyandChunkycandybars.FromthereIbecamefascinatedaboutwhymystockwentdownandotherswentup.Tome,itwaslikeatreasurehunt,lookingthroughthousandsofcompaniessearchingforthosetwoorthreestocksthatwouldturnouttobethesuperperformers.Zanger:Mymomused towatch thebusiness channelKWHY-TV, channel22,onUHFbackinthemid-1970s.ThischannelprovidedthefirsttickertapeonTVinthecountry,andshelovedtositinfrontoftheTVandreadtheLATimesand listen to the business news throughout the day. Iwould comehome fromschoolandwatchthattickertaperunningandlistentothetechnicalguystalking

stocksandcommodities,butIcouldn’tfigureoutwhattheyweretalkingaboutmostofthetime.However,Iwasfascinatedwiththetickertapeatthebottomofthescreen.Onedayoutoftheblue,onesymbolstartedtodominatethetape,anditwas

goingbyat$1,andIknewIwantedinonthatone.IraceddowntoKennedy,Cabot&Co.inBeverlyHillsandopenedabrokerageaccountfor$1,000,andIbought 1,000 shares of this cheap stock. About three or fourweeks later, thestockwasat$3.50.Isoldit,andI’vebeenhookedonstockseversince.RitchieII:Icomefromatradingfamily,sotospeak;myfatherandseveralofmyuncleswereall successful floor traders inChicago.Soyoucould say itwasinmygenes,althoughI’venevertradedfromthefloorandIwasn’tallthatinterestedintradinggrowingup,asmostofmyfamilywasretiredorontootherventuresbythetimeIbecameinterested.AfterIgraduatedfromcollege,Iworkedforaformertraderofmyfather’sfor

asummer,justplacingorders,lookingatcharts,etc.,andIreallyenjoyedit.Acoupleofyears later,heofferedmeajob,sortofbeinghis tradingassistant inthehopesofeventuallyhavingalargerpropshoporstartingafund.Whilethere,Itradedforhim,someonhisbehestandsomeonmyown.Duringthistime,mycuriosity forwhatmakesmarkets tick and how to become a good traderwasreallypiqued.I remain motivated based on my desire to continually improve, as I don’t

believeIhave“arrived”intermsofmytradingpotentialandperformance.

S1-5:Wereyousuccessfulrightaway,ordidyougothroughtoughtimes?Howlongdidittakeforyoutobecomeconsistentlyprofitable?Minervini:Inthebeginning,Imadealltypesofmistakes.Ittookmeawhileto learn the important lessons, mostly by trial and error. I produced terribleresultsforaboutsixyears.IbecameconsistentlyprofitablewhenIfinallysaidtomyself,“Theheckwithmyego;thegoalistomakemoney,notberight.”OnceIdecidedtoputmyegoaside,admitmymistakes,andcutmylossesandprotect

profits,thenthebigperformanceandtheconsistencystartedcomingtogether.Ryan:WhenIreallygotstarted,justoutofcollege,Idoubledanaccountandthen lost it all and then some. I then studied all themistakes I hadmade andbecame extremely disciplined, and then I becamemuchmore successful.Thatprocess tookover twoyears.Likeanythingelse, it takes timetogetgood,andyouusuallyhavetomakealotofmistakesbeforeyougetthehangofit.Itstartswiththerightmethod,therightmoneymanagement,averysmallegosoyoucanadmitmistakes, anda tremendousamountofdiscipline tobe successful in themarkets.Zanger:EventuallyIgotseriousaboutstocksandcameupwith$100,000in1991andgotahugesatellitedishonmyroofforreal-timequotesusingBMIandLive-Wire for charts. Neither of these two companies exists in these formatstoday.TheGulfWar had just started, and themarket soared. I quickly turnedthat$100,000into$440,000,andI thoughtIwason theroad torichesbeyondmywildestdreams.ThenIgotmyfirstexperienceofamarketcorrection,andthat$440,000quicklybecame$220,000.Ispentthenextsixyearstryingtogetthat$220,000backto$440,000,butallI

didwasgetcrushedfromonestocktothenext;andbeforeIknewit,Iwasbrokeandactuallyendedupowingmybroker$225duetothemarketbreakinOctober1997.Ihadnomorecashtoputinthemarket,soIhadtoselloneofmycarstoraise

cash to get started again. I sold it for $11,000 and deposited that into mybrokerageaccount,whichcoveredmydebtof$225andleftmewith$10,775totrade. Italso leftmesoangry that Iswore tomyself that thosebastardswouldnevergetmycashagain.Iwasnevergoingtoletabeliefblindmeandgetintheway of a trade again. I said tomyself, “If a stock gets very shaky for even asingleday,I’mout.”Iwouldtrustnostockblindlyeveragain,andIknewthatanythingImightreadduringthemarketdayisintendedtomisleadmefromthewinningsideofthetrade.

ThenextthingIknew,theInternetbubblehit,andIhaveneverlookedbackagain.ButImustadmit that itwas thatstringof losses that turnedthe tideforme;itcompletelyrevampedhowIthoughtandhowItraded.Ineverbelievedina stock’s story, or a rumor, or a news report ever again.Everything I need toknowisbasedonthestock’spricebehaviorandvolume;therestispurenoise.Ritchie II: I certainly was not successful right away. I naively thought Iwouldbe,butIlearnedquicklythatIhadsomegoodideasbutneededtorefinethem aswell asmyself in order to be successful. I’d be lying if I said that Iwasn’ttemptedtothinkaboutquittingmorethanafewtimesinmyfirstyear.IshouldalsobetransparentandsaythatIdon’tinanywayfeelthatI’vearrivedasa traderoramevenworthyof inclusioninthisbook.Thatbeingsaid,I justaboutbrokeevenduringmyfirstyearand,onarisk-adjustedbasis,havedonebettereveryyearsince.Theyear2014wasmybestintermsoftotalreturnandreturn relative to risk. Iwent from not knowingwhat Iwas doing to a prettygoodunderstandingofrisk,andmyreturnsandincomegrewalongtheway.

S1-6:Dothebigplayershaveanedgeovertheindividualinvestor?Howdoyourespondtocommentsthatthegameisrigged?Minervini:Thegameisnotrigged!Infact,thesmallindividualinvestorhasahugeadvantageoverthebigmutualfundorhedgefundmanager,mainlydueto liquidityand speed.Thinkof it as the large institutiondrivingacruise shipandthesmalltraderbehindthewheelofaspeedboat.Whodoyouthinkwouldoutmaneuverwhom?Inmy experience, thosewho say the game is rigged are thosewho haven’t

beenabletooutperformthemarket,sotheyfeelit’sunbeatable.It’snotrigged!In the stockmarket, you canmakemoney or you canmake excuses, but youcan’tmakeboth.So stopmakingexcuses and startmakingmoney.That startswithaccepting the fact thatyoucanbeat themarket ifyoureallywant to.Butyouhavetofirstacceptthatnotonlyisthemarketbeatable,butyouyourselfcandoitinabigway.

Ryan:Itwouldtaketoomuchmoneytorigthelargestfinancialmarketintheworld.That is justanexcuseforunderperformanceand isasign thatsomeonehasgivenup.Thebigplayershaveanadvantageinthattheyhaveaccesstomoreandbetter information.Theyalsopaya lot for that information.But theyalsohavemuchmore capital to invest, and so it is harder tomove around. If theindividual investor can train his eye to spot institutional buying, he canmovefasterandtakeadvantageofgettinginfrontofsomeofthatbuying.Zanger:The“size”knifecutsbothways.Thelittleguyscangetinandoutoftradesfareasierthanthebigplayers.However,thebigguysroutinelyshakeoutthe little guy with all the media power at their fingertips. Hype and lies arefavoritetoolsofthelargerplayers.Thelittleguysareleftgraspingatstrawsastheybuy toohigh,hold losers for too long,buyon thewaydown,orbuy intorumors at inflated prices. These behaviors are all encouraged and carefullyengineeredbythebigboys.RitchieII: Iwouldstartbysaying that“rigged”hasbecomeacatchphrasethat is highly ambiguous andmisleading. I would say that almost all traders,including the big players, are at a disadvantage to the current structure andmarket-making situation, based on everything I’ve experienced, seen, andstudied.Thatsaid,themarketmakersdon’tdrivetheultimatedirectionofthemarket.

Theymay screw and jerk around short-termmoves and individual executions,but if amarket is going tomove, then big funds and institutions are going todrive it. The bigger players have to buy and sell often during days or evenweeks. Individual traders have a significant advantage over the big traders,becauseindividualtraderscanmoveinandoutofpositionsmuchfaster.Sotheycanchangedirectionveryquicklywhenmarket conditions change, and tome,that’satremendousedge.

S1-7:Doyouthinkanindividualwithafull-timejobcansuccessfullytradestocksbyusingonlytheend-of-the-daypricing?

Minervini:Yes,but it’sgoingtobemoredifficult totrackyourtradesandplaceorders,soyoumayhavetorelyonmechanicalstops.Luckily,thetradingplatformsnowadaysareverypowerfulandofferahostofoptions.Ryan:Yes.Sittinginfrontofacomputerscreenallday,watchingtheaction,might sound like fun, but I have found it can also be a detriment to one’sperformance.MybiggestwinnersoccurredwhenIheldfor the intermediate tolongterm.Forme,it’sbetter toconcentrateonthelonger-termpictureandnotgetcaughtupwithintradaytrading.Sometimesamoveona10-minutechartcanlooksoscary;butwhenyoustepback,it’sveryminorwhenviewedonadailyorevenweeklytimeframe.TherehavebeentoomanytimeswhenIhavebeenshakenoutofagoodpositionby lookingat theshort-termtimeframe.Tome,thebigmoneyismadeinthelonger-termmoves.Zanger:Therearemanythatdowell tradingstocksontopoffull-timejobstoday.Smartphoneshavemovedus toawholenew level.Naturallywhenyoucan’ttradeinrealtimeandwatcheverytick,youmustbefarmoreselectiveinchoosingstocksthatmatchyourtradingstyle.ButIremembermyowndaysinthepoolbusinessholdingaQuotrek,anearlywirelessdeviceintroducedaround1983 that delivered real-time streaming quotes and news, in one hand andgrasping the steeringwheel of a truck in the other. Iwouldn’t bewhere I amtodaywithoutthatdeterminationtotradenomatterwhat.Ritchie II: If by successful you mean get a market-beating risk-adjustedreturnovertime,thenIhighlydoubtit.Ifyoumeanpickingafewgoodstocksfortheirportfoliothatwilldowellovertimefromalongertimehorizon,thenIthinkthattheindividualprobablycan,althoughfewprobablydo.

S1-8:Ifyou’renotabletobeinfrontofyourcomputerduringthetradingday,whatwouldbeyourmethodtoenterandexittrades?Minervini:Youcanenterstopswithyourbroker,andyoucanusebracketorders.Today,therearemanyalgorithmsofferedontradingplatformsthatmakeiteasierthanever.

Ryan:Stops.Iwouldsetbuyandsellstopsthenightbefore.Indoingthat,youavoidthedistractionofthemarketandmightbeabletomakegood,unemotionaldecisions.Zanger: I think the smartphone and a leading quote screen provided by anumberofbrokeragehousesareallyouneed.Thiswill showyouvolumeandpricequickly,andthenyoucantabovertoachartifneeded.RitchieII:Well,ifIwasn’tinfrontofmyscreen,Iwouldprobablyhavetotrade froma longer timehorizon inmost situations.Having said that, Iwouldstill use some kind of intraday stop protection to ensure against a very largedecline.

S1-9:Doyoueverusemarginoroptionstoleverageyourtrades?Minervini:Notanymore.IusedtousemarginwhenIfirststartedtrading.Itraded options early on, but I feel there’s toomuchworking against youwithoptions.Ryan: Irarelyuseoptions.Idon’t likethetimedecay.If thestockjustgoessideways,thetimevaluewillerode,andtheoptioncanexpireworthless.Iliketoconcentrateondoingone thingwellandnot tryallkindsof instruments. Iusemarginonlywhenthemarketisinaniceuptrendwithoutalotofvolatility,andeventhen,itisonlywhenallmystocksaredoingwell.Zanger:AttimesIusemargin,andmaybeonceayearI’llfindastockworthtryingsomecallson.Bothinstanceshavetobetherightstockattherighttime,oronecangetsmokedverybadly.IalwaystellpeoplethatIneverreallystartedtomakemoneyinstocksuntilIquittrading,orbettersaid,playingwithoptions.Rookiesloveoptions,whichiswhytheystayrookies.RitchieII:IusemarginonlywhenI’mhavingsuccessontheheelsofprofitsfrombeingfullyinvested.IfI’mfullyinvestedandthingsareworkinggreat,andnowIwanttousethosegainstobuymoreshares,thenIgoonmargin.Ionlydoit by pyramiding the whole portfolio up the same way I would a winningposition. I only trade options in specific situationswhere I think they offer a

betterrisk-rewardthantheunderlyingstock.Also,thisisusuallyinveryliquidnamesorinasituationwhereIthinkthere’sachancewecouldgetaveryrapidmove.

S1-10:Doyouthinktradingatareallyhighlevelrequiresanatural-borntalent,orcantheskillsbelearned?Howlongisthetypicallearningcurve?Minervini:Ithinktradingisnodifferentfromsports.Therearesomepeoplethathavegeneticadvantages(forexample,muscularity,agility,etc.);however,thatalonedoesn’tdeterminetheultimateoutcome.Therearegeniusesthatdon’tsucceed in life and naturally talented athletes that go nowhere. And then youhaveindividualsthatstartedoutdisadvantaged,likeIdid,buttheysucceedatahighlevel.Asfarasthelearningcurveisconcerned,there’sgoodnews.Asaresultofthe

Internet and social media, you have access to a plethora of informationpreviously not available. As long as you can sort through the BS anddifferentiate thewheat from the chaff, youhave access to somevery valuablepeople who can help really compress the time it takes to learn how to tradecorrectly.Make no mistake; nothing beats real-life experience—that’s something you

can’t force—and it takes time togainexperience.Generally speaking, Iwouldsaythelearningcurveisatleastafewyearsuptomaybefiveyears,dependingonhowmuchtimeandattentionyougivetoyourtrading.Ryan: Trading at a high level requires that a number of things be donecorrectly, and that takes certain personality characteristics. You need to beextremelydisciplined,focused,andhumbleandbewillingtolearnandtakerisk.Ifyoulackanyoneofthosecharacteristics,youcanstillgetdecentreturnsbutprobablynottriple-digitreturnsconsistently.Mostoftheskillsrequiredcanbelearned,butifyoulackthecouragetotake

risk, itwillbehard tomakeapurchasewhen thestockmoves through itsbuy

point.Orifyouhaveabigegoandthinkyouarerightandthemarketiswrong,youcansetyourselfupforaverybigloss.Ihavefoundthelearningcurvetakesabouttwoyears,anditcouldtakelongerifyouhavetocorrectsomebadhabits.You usually have to make a lot of mistakes, learn from them, and then startmakingtherightmoves.Zanger: It requires certain natural-born abilities, but the rest has to belearned.I’vehadmorethantwodozenfriendsandacquaintanceswatchmetradeduring thepast18years, andonepersonabove theothers seemed tonaturallygraspwhatIwasseeinginthechartsandwasabletogetthegistofthingsataninstinctivelevelquickly.Unfortunately,thispersonwasyoungandstillfelttheneedtogoofftocollege,whichleftnofundsortimetomastertheartoftrading.In timethis individualmightcomeback to it,andIhopeshedoes,asshewasabletoreadthechartswithrelativeease.As far as the learning curve, that really depends on the intensity of the

commitment.Areyouwatchingthemarketeverydayonareal-timefeedorjustpeekingatthemarketafewtimesaday?IfIhadtoputanumberonit,Iwouldsay the exceptional trader isworking at it full-time for at least five years andexperiencingatleastonecompletemarketcycle.RitchieII: I’m probably the best orworst person to answer this question,dependinguponhowyoulookatit.Thatsaid,Iamactuallyinthemiddlewhenitcomestothenature-versus-nurturedebate.Ibelievethatanaturalaptitudeforany endeavor is important but not necessarily essential. There is a degree towhich an individual’s drive, discipline, and motivation can override lack oftalent.Ihonestlydon’tconsidermyselftobemoretalentedorintelligentthanthenext guy, but I am blessed with a good memory and the ability to maintaindiscipline.Icertainlythinkanaveragepersoncanlearnenoughtobeadequate;tosaythat

everyonecantradeatahighlevelthoughisprobablymisleading.Inregardtothetime it takes to learn, I would defer to Tony Robbins, who says that “most

peopleoverestimatewhattheycandointwoyearsandunderestimatewhattheycandointenyears.”Somewherebetweentwoandtenyears,peoplewilleitherlearntheskillsnecessarytosucceedorprobablygiveup.

S1-11:Isitstillpossibletogetrichtradingstocksevenifyoustartwithasmallaccount?Minervini:Absolutely!Therearestillgreatopportunities,andtherewillbemanymore in theyears to come.Thecommissions are low, and the access toavailableinformationhasmadeforaverylevelplayingfield.It’sagreattimetobeastocktrader.Ryan:Definitely.Thepowerofcompoundinggainsoveranumberofyearsisenormous.Butyoucan’tdoitallinoneyear.Thekeyisexecutingyourmethodcorrectly andnot focusingonyour equityvalue. If youworkhard, learn fromyourmistakes,andstaydisciplined,thegainswilltakecareofthemselves.Zanger:Not only am I sure that it is, but Iwould recommend starting outsmallratherthanlargeforallnewtraders.Bottomline,ifyouhoneyourtimingandtalenttospotthesetupsandifyouhavethefortitudetosticktotherules,itdoesn’t matter if you start out small; you have a true edge that few traderspossess, especially if you do your homework every night and onweekends. Iwouldn’tbehereifthatweren’ttrue.RitchieII:Thisalldependsuponwhatyourdefinitionof“rich” is. Idon’tconsidermyselfrich;however,I’vebeenabletotakearelativelysmallaccountandgrowitprettynicely,earnagoodliving,andmakegreatrisk-adjustedgains.Sointhatsense,I’mveryrich.However,Ihaven’treachedmylonger-termgoalsyet. I wouldn’t be trading if I didn’t believe the stock market offered theopportunitytogrowcapitalnicely.So,yes,ofcourseit’spossible.

SECTIONTWO

StockSelection

S2-1:Whatisthebestwaytofindmomentumstockswithbigpotential?Minervini:IrequirethatthestocksshowstrongrelativepricestrengthwithhighalphaandlowstandarddeviationbeforeIbuy.OneofthefirstbooksIreadon the subjectof relative strength (RS)wasTheRelative StrengthConceptbyRobertLevy.YoucanscreenthemarketforstrongRSstockswithmanyofthetools that are readily available today; there are free tools as well as paidsubscriptionplatforms.Ryan:Iwouldliketochangethatquestiontofindinggrowthstocks,becauseIwillnotbuyastockjustbecauseitisgoingup.Thestockhastobeactingwellinthemarket and have an earnings profile of the greatest winning stocks of alltime.ThesourceIusethemostisMarketSmithfollowedbyInvestor’sBusinessDaily.Bothsourcesaredesignedtohelpyoufindthebestgrowthstocks.Theybothprovidenumerousscreensandlistsforyoutozeroinonthebeststocks.Zanger:Priceactioniseverythingtome.Showmethebigmovers,andI’llshowyouastockIwanttoown.Ofcourse,I’llbestealthyaboutitandlookforaspecific setup before considering it. I might even have to wait a fewmonthsbefore I jump into a strong mover with the right setup. Remember, thesemomentumstocksaretemperamentalandcangoagainstyoujustasfastifyoubuythematthewrongtime.OnemistakeIseeoverandoveragainisrookietradersbuyingastockthatis

alreadyup$10ontheday.Theiremotionsgetthebetterofthem,andtheurgetojump in overwhelms them. They believe resolutely that the stock can gonowherebuttothestratosphereinthenextfewdays.Afewhardreversals,andthese tradersaregone—andblaming thecruelvicissitudesof themarketwhentheyshouldjusttakeresponsibilityfortheirownlackofrestraint.

RitchieII:Thebestsituationsinmyopinionoftenlookthescariest.Meaningtheyhavehadarapidpriceadvanceandlookexpensive.Relativestrengthisonewaytofindthesekindsofsituations;thehighertheRS,thebetter.

S2-2:Doyouhaveaminimumamountofvolumeforthestocksthatyouaretrading?Minervini:Yes,althoughformeit’sprettylow.Ioftentradestocksthatonlytrade100,000–300,000sharesperdayandevenaslowas50,000sharesperday.Youshouldn’tbeafraidofthinlytradedstocks;youshouldembracethem.Someof thebiggestwinnersare small companies thatyou’veneverheardofbefore.But you have to be careful and only trade a position size you can get out ofsafely.A small position is better than no position, especially if the stock has the

potentialtoskyrocket.Thismeansthatifthestocktradesonly50,000sharesperday, I have to adjust my normal position size to accommodate. But a smallpositioninasmallstockthatmakesabigmoveisbetterthanabigpositioninaliquid stock that goes nowhere. I’ve made most of my money in relativelysmallernames.Ryan:Thestockusuallyhastotradeatleast100,000sharesaday,orIavoidit.Zanger: I try to staywith stocks that do at least 2million shares a day ormore. It’s very hard to sell 100,000 shares ormore of a stockwhen it breaksdown due to a downgrade or a generalmarket plunge. Even stocks that tradehigher at 2 million to 4 million shares a day can have extreme volume orliquidity“dry-ups”attimes.Nothingisworsethanbecomingyourownworstenemyasyourownselling

sendsthestockdownandnoonewantstobuythestockontheheelsofbadnewsoradowngrade.Every1,000sharesyousellcancausethepricetotankanother$0.50to$1asyouchipout.IrememberanoccasionthatIboughtBaiduInc.(BIDU)onabreakoutinmid-

September2007,andit ranfrom$212toover$360in just threeweeks.Iheldover60,000sharesatthetime,andsomefirmdowngradedthestockwhenitwasin this $360 area, and it started dropping right at the open. I thought thisdowngradewasgoing to take it downabout$10,but it quickly surpassed thatandwaseventuallydown$17withnobuyersinsight.Isaidtomyself,“Thisisnotgood,”andIstartedunloadingsharesquickly.Thestockwasdownanother$5 before I got out completely, but it eventually finished the day down awhopping$60!Ican’ttellyouhowhappyIwastohavesoldwaybeforebeingdownthat$60.Nowrememberthisstockwastrading2millionto3millionsharesadayprior

tothissell-off,andIstillgotsmoked.Ihavemanyotherinstancesofheavysell-offs,but the importantpointhere is toadjustyourpositionsize to theaveragedailyvolumethatthestocktradesincaseyouneedtogetoutquickly.RitchieII:Iusuallydon’ttradenamesthatdon’ttradeatleast25,000sharesadayonaverage.

S2-3:Have“darkpools”changedthewayyouanalyzevolume?Minervini:No.Althoughvolumecouldbeskewedabitintradayandaffectextrapolation,allvolumedataareincludedintheend-of-the-daytally,andthat’sthenumberIfocusonthemost.Ryan:Tome,volume is the lifebloodofastock.Volumedisplays thebasicsupplyanddemandforastock.Bigstockmoversarealwayspoweredbyhugeincreases in volume. That big volume, asWilliamO’Neil has always said, is“not yourAunt Suzywho lives down the street” but themutual funds, hedgefunds,andotherbigmoneymanagerspoweringthestockhigher.Regardlessofdarkpools,thevolumecharacteristicsofbigwinnershavenotchangedandarestill showingup. Ifyoudon’t learnhow toanalyzevolume,youaremissingabigportionofthetechnicalpicture.Zanger:Volumeisthemother’smilkofmomentuminvestingandisessentialtopricemovement.Thevolumeindarkpoolsisstillfactoredinbytheendofthe

day,sothetotaltallyofsharescanstillbeseen,albeitlate.Personally,Ihavenotnoticedmuchimpactbydarkpoolssincetheyhavecomeofage.Ritchie II: Volume plays an important part in how I analyze a situationbecauseIwanttolookforstocksthatappeartobeunderaccumulation,soI’moftenlookingforlargeupdaysonbigvolume,aswellasdecreasingvolumeonselling days. I don’t see dark pools as beingmuch of a factor inmy analysisbecause I’m looking for the overall trend in volume behavior; and often I’mlookingat themid- to smaller-capitalized stocks,whichdon’thaveasheavyadarkpoolparticipation.

S2-4:Doyoueverbottom-fish?Minervini:Ifyou’reaskingifItrytopickabottomwhenastockisfalling,theanswerisno!However,Iwillbuyastockcomingupoffanormalpullback,but only if it’s moving up through a pivot point and the stock is in a stronguptrend. I never try to catch falling knives. Inmy experience, it just leads tolosses.Ryan:Ineverbuynewlows,ifthatiswhatyouareasking.Zanger:Icatchafewmuddyfisheverynowandagain,butthatisrare.Allthebiggest-movingstocksI’veownedduringthepast20years,whereI’vemade95%ofmymoney,wereoneshittingnewhighsfromverysolidbases.RitchieII:Never in amomentum situation. Iwill from time to time scalpfutures inwhatcouldbeconsidered“bottomfishing,”butonlywithvery tightpriceandtimestops.

S2-5:Howaboutapricecutoff—doyoubuylow-pricedstocks?Ifyes,doyoutreatthemdifferentlythanyoudohigher-pricednames?Minervini:Mostpeoplethinkyouneedtoinvestinalow-pricedstocktogetinearlyandmakeabiggain.They think it’seasier fora$1stock togo to$2thanit isfora$30stocktogoto$60.Nottrue!Butit ismorelikelythata$1stockwillgotozero.Usinghistoryasaguide,onaverage,thebiggestwinningstocksstartedtheirmajoradvancesabove$30ashare.

Another mistake investors make is that they think it’s better to own moreshares,sotheybuylow-pricedstocks.Justtheopposite!Iwanttoowntheleastnumberofshares;themoresharesIown,themoreofaliquidityissueIhave.Ipreferhigh-priced stocks—above$20–$30—versus low-priced stocks.Mostofthe time my cutoff is $12 per share—80% of my trades are in higher-pricednames above $20–$30, which aremore likely to attract institutional investorsandsupportthestockwithbuying.Theseverityofthebearmarketin2008createdaproliferationoflower-priced

names. Coming off that low, I traded more low-priced names than usual.However,low-pricedstocksrarelymaketheirwayintomyportfolio.Whentheydo,I trytoget inat thelowest-riskbuypointpossiblebecausetheytendtobemorevolatilethanthehigher-pricednames.Ryan:Irarelybuystocksbelow$15.Thebetter-qualitycompaniesareusuallyhigherpriced.WhenIdobuyalower-pricedstock,itistreatedthesamewayasthe rest of the stocks inmyportfolio.Nothing should change just because thestockhasalowerprice.Zanger:Ifindmostcheapstocksarecheapforareason,astheylackmanyofthecharacteristicsI’msearchingforinastock.Also,ifa$100stockbreaksoutfromanicebaseandfails,Icanthencutmylossat3%orso,whilea$10stockthat moves down $1 just cost me 10%. Higher-priced stocks tend to be veryliquidandcanmakesomenice$30–$50gainsinjustafewweeks.I rarely buy stocks under $70 a share, but I did buy a $2 stock recently. In

November 2013, I bought this little biotech stock, Idera Pharmaceuticals Inc.(IDRA).Iboughtover450,000sharesataround$2.20orso,anditmovedupto$6.60intwomonthsandthenstalledout(seeChart2.1).Whenitstalledout,Istartedunloadingsharesforagainofabout120%netbythetimeIfinishedmyselling.ThatisprobablymyonlysuccessstorythatIcanrecallonstockspricedunder

$70sincetheInternetbubble.Iroutinelyboughtstocksinthe$40–$60areathen,

thoughmanywerewellover$70upto$300.

Chart2.1IderaPharmaceuticalsInc.(IDRA),2013–2014

Ritchie II: For momentum trades, I only buy low-priced stocks that areliquidandinthehighest2–3%ofrelativestrength.Ialsotakesmallerpositionsrelativetomygeneralexposurebecausethevolatilityinthosenamestendstobehigher.

S2-6:Doyoulookforindividualstocksfroma“bottom-up”approach,ordoyoufindagroupthatyouseeasleadingfirstandthenlookfortheindividualstockswithinthegroup?Minervini:WhenIfirststartedtradingaboutthreedecadesago,Iwasatop-down investor. Iwouldstartwith thegeneralmarketand then lookat thebestgroupsandfinallythestocksinthosegroups.WhatIfoundwasthatbythetimethegroupwashotinastrongmarket, thebeststockshadalreadyblastedoff.I

wasconstantlymissingtherealmarketleadersthatmadebigmoves.Ithenflippedthewholeprocess,andmyperformanceimproveddramatically.

Thereasonthisworksbetterisbecauseleadingstocks,bydefinition,lead.Someleaders don’t even correctmuch during a downmarket. Thatwas the case in1990withstocksinthehealthcaresector.NamessuchasAmgen(AMGN)andU.S.Surgical (small unknowncompanies back then) barelyundercut their 50-daymovingaveragesduringwhatwasaprettyseverebearmarket.Theyturnedouttobehugewinnersinthesubsequentbullmarket.Ryan:Itisusuallyabottom-upapproach,butsometimesIseeagroupmovedeveloping,andIscanthegrouptryingtofindthebeststockwithinthatgroup.WhenIdoscreensovertheweekend,Iusuallysortthemingrouporderwiththestrongestgroupatthetopofthelist.Yourbestmovesoccurwhenthestockyouownisinoneofthetop25%ofallgroups.Zanger: The latter definitely. I look for strongmoves in groups, and thenafter I hone in on a group, I try to focus on the leaders in that group.This isgenerally trueforme,andyet therehavebeenmanystocks that I’veownedingroups that arenot leaders. I have found somegreatwinners in someobscuregroupsactually.RitchieII:Ilookforstocksfirst.WhateverIsee,Iaddtomylists,andthatoftenshowswherethestrengthisintermsofwhattheoverallthemesareorwhatgroupsarefallinginandoutoffavor.

S2-7:Howdoyoufindleadingindustrygroups?Minervini:Iletthebest-performingstocksleadmetothebestgroups.Theindustry group is made up of stocks, so I focus on the individual stocks.Sometimesthereareonlyafewnamesinagroupthatlookattractive,andothertimestherearemany.Forexample,thesemiconductorindustryismadeupofalargenumberofcompanies.Thekeyistospottheleadersinthegroupasearlyaspossible.This takesaneye thatcandiscern individualstockstrengthduringgeneralmarketandevengroupweakness.For instance, if theNasdaqisbelow

its200-daylineandits50-dayline,itmaybeworthlookingintostocksthatareabovetheirown200-and50-daylines.Whenthemarketturnsup,thosestockscouldbeyournextmarketleaders.Ryan:Igothroughhundredsofstocksaweeklookingforleadership.Usually,when a stock makes a good move, then there are others in the group alsomoving. I also findwhat groups are leadingby looking at Investor’sBusinessDailyandMarketSmith.AsfarasIknow,thosepublicationsarestillusingtheweightingsIdevelopedforrankinggroupswhenIworkedforO’Neil&Co.Zanger:IusethechartprogramfromAIQTradingSystems,andIhavebuilta large listofpriorgood-moving stocksand indexes that I’veentered intomy“TagList.”IscrollthroughthisTagList,stockbystock,everytwotothreedaysto gain a sense ofwhich groups of stocks or industries areworkingwell andwhichonesaren’t.It’samanualprocessthathasworkedwellfor25years.Bytheway,thislist

containsabout1,400stocks,making itvery labor intensive toscan.But this isthefoundationofwhatwedo:spotthesetupsandthechartpatternsasearlyaspossible.RitchieII:Idon’tsearchforgroups;Isearchforstrongstocksandthenseeifthereareanygroupsorthemesthatemerge.

S2-8:DoyoutradeIPOs(initialpublicofferings)?Howdoyoudefinemomentuminanamethathaslittletradinghistory?Minervini:First,IwaitfortheIPOtohavesometradinghistory.Iliketoseeat least threeor fourweeks.When tradinga recent IPO,your time framesaredefinitely going to be compressed. There is no long-term trend in just a fewweeks,soIfocusonthestockchartanditspriceandvolumeaction.Iwant toseethesamecharacteristicsformingintermsoftechnicalandfundamentalsasIwouldinanamethathasalongertradinghistory.Ifasoundbasedevelops,Ibuyasthestockemergesfromtheconsolidation,preferablynearitsall-timehigh.Ryan:Yeah,metoo.IliketobuyanIPOafterithasbeentradingforatleasta

coupleofweeks.ThebestIPOisonethatcomesoutinaterriblemarketwhennoonecares;itthenbuildsagreatbaseofthreemonthsormore,andit’soneofthefirsttobreakintonewhighgroundwhenthemarketstartsactingbetter.Zanger:SomeIPOstradefastrightoutofthegateandaregenerallygoodforafewdaystoaweekorso,andthentheyrestorbaseforanywherefromafewweekstoafewmonths.IbuythebreakofanysolidpivotareaonanIPOjustasIwouldanymomentumstock.RitchieII: I trade IPOsbutnoton their initialday.LikeMarkandDavid,generallyIliketoseethattheyhavetradedforatleastafewweeksandideallymonthsbeforeIconsiderpurchasingthem.OnceanIPOhasestablishedadecentrange,ItreatitsimilartoanyothersituationImaybeinterestedin.Still,Imayweigh a newer issue a bit heavier, because by definition it isn’t as widelyfollowedorasextensivelyownedby institutions,soyoucouldbe lookingatapotentiallybigwinner.

S2-9:Doyoutreatlargecapsdifferentlyfromsmallcapswithyourselectioncriteria;ifso,how?Minervini:Large-capstocksaregoing tobemorewidely followed, so it’smorelikelyyouendupina“crowdedtrade,”especiallyafterthestocksgetrealhotandeveryoneistalkingaboutthem.Asaresult,thepriceactionwilloftenbemore random,so I tend to let thesenamesundercut lowsandcreate shakeoutsbeforegettingin.Withlarger-capstocks,Iwilloftentrytogetonboardearlierintherangeofacorrection.Thebesttimetobuythelarge-capnamesiscomingoutofabearmarketoradeepcorrection.Withsmallcaps,Itendtotradethemclose to new highs because they’re less efficiently priced, so I don’t have to“beatthecrowd”andtrytobuylower.Ryan:WhenIlookatalarger-capstock,Iassumeitwillhaveaslowergrowthrate than thatof a smaller company. It’s just amatterofnumbers; it’shard todouble sales in a company that already has annual sales of a billion dollarscomparedwith that of a companywith annual sales of $200million.There is

usuallymore liquidity ina larger-capcompany,and it’seasier tomove inandout.Butyouwillrarelygetapricemoveasgreatinalarge-capcompanyversusasmall-capcompany.Zanger:Iusuallyneverlooktoownlarge-capstocks,astheydon’tgenerallyhave the growth rates that I’m looking for. There have been a few that I’veowned and traded—stocks like Apple (AAPL), which has close to 6 billionsharesoutstandingbutstillhasgrowthratesat30%.MoststocksI tradeare inthe 40million to 800million share range,with a few recentmovers in the 2billion share range like Facebook Inc. (FB) or Alibaba (BABA). Alibaba gotreallyhotamonthafteritwentpublicbutlatercrashed.Istillmanagedtolockina$25gainbeforeitcrashedthough.RitchieII:Thelargerthecapthestockis,themoreIdiscountit,andthisissimplyforthereasonthattheoddsofinefficientpricingareinversetothesizeofthestock.Bydefinition,ifastockiscoveredbymanyanalystsandwatchedbythousands of traders, then it has a far less probability of being inefficientlypriced and thus yielding a quick alpha move. It doesn’t mean the stocksshouldn’t be traded or purchased at certain times; but in general, if you’relookingforalpha,youshouldbediscountingthelargercapitalization.

S2-10:Doyoushortstocks?Ifyes,howdoyoudecidetofliptotheshortside,ordoyouholdlongsandshortsatthesametime?Minervini:Irarelytradelongandshortatthesametime.I’musuallylongorincash.Inabearmarket,Iwilltradefromtheshortside,andImayalsoshortstocks if I seea top formingandabunchof leadersbreakingdown. If Iget amajorbreakinastock,Iwillsometimesshortalow-volumerally;butIenterasthestockstartssellingoffagainandvolumestartstoincreaseonthedownside.Ryan:Itisrarewhenyouhaveamarketwhereyoucanhavebothlongsandshorts.Inamarketthatistrendinginonedirection,that’sthesideyoushouldbeleaningtoward.Marketsmovingsidewayscanbeverytoughtotradebothways.Ihavemademostofmymoneyonthelongsideandtendtositonthesidelines

duringabearmarket.Zanger: I can’t say that I short at the same time I’m long. If themarket isstrong,whybeshort?Shortsneverpayinastrongmarket.Overall,Irarelyshort,asIusuallyfocusonsuchvolatilestocksthatthesnapbackscanbeverysuddenand take you out of your position so fast that you don’t have time to reactquicklyenough.IwillsaythatI’vehadsomeverysuccessfulshortsinmytime.Butallofthem

camefromstocksthatwerebreakingtheirlong-term,rising,steeptrendlinesorrisingchannelsandweremissingearningsatthesametime.Infact,eBay(EBAY)in2004wasaverybigwinnerformewhenitfailedon

earningsandIwasshort160,000shares—thestockplunged$20inlessthan10minutesafterpostingearnings.Thestockcontinuedtomovemuchlowerforthefirst fewdaysfollowing thecompany’searningsrelease,and thenIcovered tolockinthegains.Butshortsalewinnerslikethatarefewandfarbetween.Ritchie II: I have found shorting to bemuchmore difficult than the longside,andIdoitfarlessfrequentlyandinadifferentmanner.Forstarters,Idon’tevershortunderlyingsinglestocksoutright,mainlybecause,inprinciple,Idon’tbelieveintradingthingsthatcanhavetheoreticalunlimitedrisk.SoifI’mgoingto short a stock, it will only be through options—and usually using spreadswhereIcanveryeasilydefinetheriskaswellas therewardandweighwhatIbelievetheprobabilitiestobe.Thesamegenerallygoesforthemarketasawhole,asIwillsometimesshort

themarketindexesbutmostlythroughoptionsoroccasionallyfutures.Mystyleof shorting is usually following a big break; then I look to short a proverbial“dead cat bounce.” I don’t want to be shorting anything that is in new highground,asthatisashort-termlosingpropositioninmyview.

S2-11:Doyoueverwaittotradea“favorite”onyourwatchlistandholdofftradingotherstocksasaresult,whilestillwaitingforthatfavoritetotriggerabuy?

Minervini:Itrynottohavefavorites.Eventhoughmyintuitivefeelisprettygood, I have learned not to trust my opinion, because it will eventually bewrong.Ifyouhaveastrongconvictiononatrade,itwillbedifficulttotrustthemarketanddivorceyouridea.IfIwaitforacertainstockthatIthinkwilltakeoffwhile others are breaking out, I couldmiss a key leader. Iwant to let themarketactionguideme,notmyopinion.Marketsareneverwrong,butopinionsoftenare.Ryan:No.Ifotherstocks,withallthecharacteristicsIlookfor,arestartingtogothroughbuypoints,Iwillbuythem.That“favorite”onmywatchlistmightnevermoveagain,andIwouldbesittingwithequitythatcouldbedeployedinstocksmovinghigher.Zanger:Idothatoften,butonemustbecarefulsinceanewstockemergingfromabasebeforeyour“favorite”mightverywellbethenexthighflyer.Iwilltypicallyplaythenewbreakoutofthislessfavoredstock,andifitrunshard,itcouldeasilybecomemynewfavorite.Thenifmyoldfavoritebreaksout,Icanalwaysreducemypositioninthenewstockanddeploythatcashbackintomypriorfavorite.RitchieII:Well,“favorite”isabitofatrickywordbecauseItrynottohavefavorites,becauseitcancloudgoodjudgment.However,ifthereisastockthatIknow I want to buy, I will buy it regardless of how many I’ve purchasedbeforehand.IfIonlywanttoputonacertainamountofexposureandastockIwanttoownhasn’ttriggered,thenIhaveachoicetomake.However,Iusuallydon’tholdofffromotherstocksthatmeetmycriteria,asIbelievethemarkettobesmarterthanIam;soIwilltrytobuywhicheverstockgoesfirst.

SECTIONTHREE

PositionSizing

S3-1:Howmanystocksdoyounormallyown;doyoubelieveoneshouldconcentratenarrowlyordiversifybroadly?Minervini:Thebottomlineisthatyou’renotgoingtogethugeperformanceconsistently if you’re diversified all over the place. If you have a significantedge,diversificationdoesnotprotectyou;itdilutesyou.IwanttoconcentrateasmuchofmymoneyasIcaninapositionupto25%ofmyportfolio.Imaynotstartoutat25%,butthat’swhereIwouldliketobeformybestpositions.Thisnumberisnotjustoffthetopofmyhead;mathematicallyspeaking,theoptimalpositionsizefora2:1traderis25%.Youcanlookup“Optimalf”orthe“Kellyformula”togetabetterunderstandingofhowtodeterminethis.Ofcourse,withheavyconcentration,youhavetostayfocusedonthesetrades

andmoveoutofthemimmediatelyifsomethinggoeswrong.Butthat’showyoumakehugereturns,byconcentratingandthenmanagingthedownside.Bydoingthis,you’llmakebigmoneywhenyou’reright.Ryan:Markisabsolutelycorrect!Tomakebiggainsinthestockmarket,youhavetoconcentrate.Iinitiateeachpositionwitha10%weighting:10positionsinmyportfolio.Ineverwanttoexceedthatnumberofstocksbecauseitgetstoohardtocloselyfollowmorethanthat.Ifoneofmystockshasanicemoveup,buildsanewbase,andstartsmoving

upagain,Iwillincreasethepositionevenmore.Whereitmightnowbe13%ofmyportfoliowithappreciation,Imaybuyanother5–7%andmoveittoan18–20%position.Yousee,Iwillonlyaddtopositionsthataremovinghigherandperformingwell.Positionsonlybecomebiggerwithappreciationandfollowonpurchasesafternewbasesareformed.IfIdon’twanttogoontomargin,Iwilldecreaseoreliminatetheunderperformingpositionsinmyportfolio.

Zanger:Thatreallydependsonthemarket.Isitastrongbullmarket?Whatisthelengthofthebullmarket?Howbroadbasedisit?Inverystrongmarketsthatdon’thaveasinglemassivemover,Icouldhaveasmanyas22stocks.Inmoretypicalmarketswithfewerstrongmovers,Imighthave8to10stocksandstillothertimesjust5to6stocks.Whenthemarketisverychoppywithviolentdowndaysandgappingallovertheplace,Imightbe10–15%investedinjusttwoorthreestocks;orImightgotononeatallifthemarketisextremelychoppylikeitwasin2014.In2006, Igotchewedupbadly inaverychoppymarketevenasnewhighs

wereseeninthemarket.Newhighsarenotaguarantee.Onekeytothrivinginthis game over time is to avoid taking any positions even if there are a fewstockstemptingyouwithnewhighs.Forme,amarketwithjustafewstocksonthemoveisnotastrongvalidationtotrade.The overall market must be showing strength with higher highs and a

significant portion of those market stocks marching into new highs as well.Manystrongbasesonthecharts,aswellasstrongexpandingearningsonahighnumberofthosestocks,arecriticalindicatorsoftheoverallhealthofthemarketandultimatelymyportfolio.RitchieII:ThenumberofstocksvariesquitedrasticallydependingonhowhealthyIperceivethemarkettobe.Indefensiveperiods,Ihavenopositions;incontrast,whenI’mfullymargined,Imayhaveasmanyas20.ThisalsodependsuponwhereIbelieveweareintheoverallcycleofabullmarket,butideallyI’dliketobeasconcentratedasIcanbe.I don’t believe diversification is necessarily bad, but it’s certainly a

catchphrasethatisoverratedifyouwanttooutperformthemarket.Theonlywayto consistently outperform is to be concentrated in the names that areoutperforming. In fact, Iwould argue thatwhen it comes to trading, anythingyou hear as generally accepted wisdom should probably be questioned, anddiversificationisnodifferent.

For example, being more concentrated in a few names is deemed as morerisky,andbeingspreadoutallovertheplaceisdeemedsafe.Ifyouhadachoicebetween being able to own 5 stocks and 50, it might appear that owning 50would be safer; however, how could someone possibly be as focused on 50positionsasheorshecouldbeon5?Ifyouareonlywatchingafewnames,youwillknowtheminutesomethingis

not acting right and be able to act. In addition, how many names can trulyoutperform? So by definition, if you’re in a larger number of stocks, you’reguaranteed to have a larger percentage of underperformers—all things beingequal—becauseonlyasmallpercentageofstocksreallyoutperformatanygiventime.

S3-2:Howmuchofyourtotalequitydoyouputatriskinatypicaltrade?Minervini: Usually between 1.25 and 2.50% of my total equity. Forexample,ifIhavea25%positionwitha5%stop,then1.25%ofmytotalequitywouldbeatrisk.Ryan:At themost, I risk1%ofmy total equityon each trade. I dividemyequityinto10positionsora10%weightingontheinitialpurchaseofaposition.IfIsufferamaximumlossonastockof8%,thatactuallyequatestolessthana1%loss.Itmostcases,Icutthelossbeforethe8%limit.Zanger:Ikeepmystopsfairlytight,soImightberisking2–3%ofthevalueof thatone trade.That is,of course,unless it has amassivegapdownonbadnews,whichhashappenednumerous times inmycareer,and Icould lose10–15%ineachpositionormoreovernight.In a typicalmarket, I have amaximumof 10%ofmy account invested per

trade;sothatmeansI’mriskingjustafractionof1%(20–30basispoints)ofmytotal equity per trade.On rare occasions, if a stock hasmassive earnings andspectacularvolumeonitsbreakout, thenImightstretchmypositionsizeupto25%.

RitchieII:My risk per trade has gone downon average over the last fewyears;butonaverage,astartingpositionwillgetabout50basispointsofrisk,andthenIwillscaleupfromthere.

S3-3:Whatnumberofpositionswillgenerallygetyoutofullyinvested?Minervini:Rarelymore than10 to 12positions, but I like to get asmuchmoneyasIcanin4to8ofthebestnames.Ryan: Inmy portfolio itwould be 10 or less. I dividemy portfolio into 10differentsegments,startingwithaninitialpurchaseof5%.Ifitquicklystartstowork, then theposition is increased to10%.From there, themovementof thestockwill determine how big the positionwill getwithin the portfolio. If thestockmakesanicegainandisnow15%oftheportfolioandbuildsanewbase,Imightincreasethepositionasitbreaksout,anditisnow20%oftheportfolio.Zanger:Thatdependsonthemarketandhowmanygreatmovingstocksandsectorsthereare.Itcouldbeanywherefrom8to25stocksdependingonmarketconditions.RitchieII:Anywherefrom4to12generally,whichhasmoretodowiththeconfidence Ihave inmy tradingof lateaswellaswhere I thinkweare in theintermediate-termcycle—i.e.,beginning,middle,laterstageofabullrun,etc.

S3-4:Whatisthemaximum-sizepositionyouwouldtrade?Doyoueverputyourentireaccountinonestock?Minervini:Mymaximumistheoptimal25%.Ifyou’remoreconservativeornewattrading,maybeyoucanhave10–12%positions(8–10stocks).Butthereisnoneedtoown25names,andyoushouldneverriskyourentireportfolioinjustonename;that’swaytoorisky!I learned this lesson on a near miss in the early 1990s. I was thinking of

buying a stock—I think it was called Future Healthcare of America—but Ididn’t.Thenextmorningthestockgappeddown80%.RightthenIrealizedIcannever risk itall in justonename.But if Ihavea25%position, Ihaveenoughconcentration to make really big gains; however, if something catastrophic

happens,thelossisstillrecoverable.Ryan: When the overall market is acting well and most of my stocks aremovinghigher, I canget a position to a 25%weighting, but that is only afterappreciationofthestockhascausedtheweightingtogetbigger.Iwon’tstartapositionat25%weighting.Zanger:Ihavebeen“allin”justonce,anditnearlywipedmeoutcompletely.Thestockofacertaincompanywastradingat$27onFridayandwentdownto$6onMondayafterBarron’sranastorythatmystockwasatotalfraudbasedon the company’s accounting practices. Thank God that stock was notmarginable, or I would have had to hand all my belongings to a bankruptcyjudge.On the other side, I once had a very large position inGoogle Inc. (GOOG)

aroundthetimeitfirststartedtorunin2005.Itamountedtoabout50%ofmyaccountatthetime.ThatwasamajorsuccessformeandalsowasthelasttimeIloadedupsolargeonasinglestock.AppleInc.(AAPL)in2012madetwobigruns,andIwasinatnomorethana30%weightingeachtimeitran.Asageneralrule,ifit’saverypowerfulmovercomingoutfromagreatbase

withspectacularearnings,Iwouldbuyupto20%inonestock.RitchieII:Inormallydon’tgoover25%inonestock,buttherehavebeenafew select situationswhere I’ve gone as big as 50% in one name. Iwouldn’tadvocate putting all your account in one stock, and I have never done that. IwouldonlyhavealargepositioninanamethatIalreadyhaveaprofitin,sothatIbuildintoalargerpositionasthetradeisworkingforme.

S3-5:Whatistheminimumpositionsizeyounormallytradeasapercentageofyouraccountequity?Minervini:Ifthingsarenotworkingoutandstopsarebeinghitrepeatedly,Iprogressivelyscalebackmypositionsizing.Sothereisnominimumunderthatscenario.However,Igenerallyliketohaveatleasta5%positiontostart.Ryan:Whenthemarketisnotinasoliduptrend,Istartmypositionssmaller

at5%andthenworkthemhigherastheysucceed.Zanger:Well,ifit’satough,choppyenvironment,Imightdo1%justtostayintunewiththemarket.Ithinkkeepingahandinthemarkethelpsyoumaintainabettersenseofwhenthingsstarttoimprove.Withnoskininthegame,it’stooeasytobeonthebeachorgolfcoursewhenthingspivot,andthenyoumissthemoves.Ritchie II: I don’t have aminimum specified amount, because sometimestheremaybea thinnernamethatIcan’tbuyverymuchof,butI’llstill takeapositionbaseduponwhat Ibelieve tobeappropriate in termsof liquidity.Fornameswhere liquidity isn’t an issue (which ismost names), I generally don’ttakesmallerthana6.25%position.

S3-6:Doyouposition-sizeeachtradebasedontheamountofdollarsatriskorafixedpercentage?Minervini:SometimesIgointoatradeandsaytomyself,“I’monlywillingtoriskacertaindollaramountonthistrade,”andthenIbackintothatnumber.Butmostofthetime,Iuseapercentage.Generallymy“toe-in-the-water”tradesare5–10%positions.Andwhenthingsareworkingwell,Itradewideopenwith25%ofmyportfolioinafewofthebestnames.Ryan: I work on a fixed percentage. As the account gets larger, thepercentagesstaythesame.Zanger:IapproacheachnewtradebycalculatinghowmuchIstandtoloseifthestockgapsdowntomorrow.Iwantdamagecontrolinplacebeforeenteringthe trade,notafter. If I’mcomfortablewith thatpotentialdollar loss, Isizeupthestock’sliquidity,whichdirectlydetermineshowquicklyIcangetoutshouldthe stock swoononme.Then and only then,will Imove forward to the finalimportantfactors.Ifit’satop-notchcompanywithastrongglobalpresenceandgreatearnings,Imightthenputupto20%ofmyportfoliointhatsinglestock.Moretypically,inastrongbroad-basedmarketmove,5–7%isabetteraverage

for each stock,but Iwillputmore in themostpowerfulmovers.Youhave to

have a good feel for themarkets to determine your best position sizing. Thatinstinctreallyonlycomeswithhavingbeenthroughthewashingmachineafewtimestoemptythesparechangeoutofyourpocketsandleaveyouclean.RitchieII:Ideterminethenumberofsharesbaseduponapercentageofthecapital I am allocating to equities, but I have a very good idea of what myaveragelossisovertime,soIalwayshavetheamountofequitythatI’mriskinginmindbothonanindividualtradeandacrosstheoverallportfolio.Ifthereisnoneed for liquidity provision, then I generally trade in fractions of my largestposition; so, for example, if 25% ismy largest line, I will trade in 12.5% or6.25%increments.

S3-7:Doyouincreaseyourpositionsizebasedonthegrowthofyouraccountthroughouttheyear;ordoyouusethesamepositionsizethewholeyeartomaintainthesamedollarriskpertrade?Minervini: I use the whole account. But I would recommend that a newtrader hold off a bit until the account is upmaybe 25% or even 50% beforeincreasing.Ryan: The size of a position is determined by a percentage of the entireaccount. Itdoesn’tmatter if it is$100,000or$1million; a startingposition is10%ofthewholeaccount.Zanger:GoodquestionandoneI’vehad todealwithforyears. I trynot toincrease the size of my trades as the year goes on. This is predicated on thepresumption that the market is advancing while my account is progressing,whichincreasestheprobabilitythatthemarketisbecomingmoreextended.Asaresult,it’svulnerabletoacorrection,whichcanbecomemorecostlytomefromtheincreasedriskrelatedtomylargerpositionsizes.Ritchie II: I think of this in terms ofmy risk of drawdowns, so as to beaggressive enough where I can increase my position size upon success, butdefensiveenoughsothatIdon’thavetocutsizeseverytimeIhitabadperiod.ThewayIdothisisbylookingatmypasttradingtodeterminewhatmynormal

percentagedrawdownsare.Once Ihave that levelestablished, Idon’t increasemy position size until I have earned a significantly larger portion than myaveragedrawdown.

S3-8:Whatgivesyoutheconfidencetotakeaverylargeposition?Minervini: The lower the risk, the larger the position I feel comfortabletaking.Riskisdefinedbyhowbigmystoplossisandhowliquidthenameis.Igradethetradeintermsofapokerhand.Acesandkingsgetmyfullestattention—those are premium hands—while a pair of sevens may only get a partialweighting. I alsowant tohavea stringof successful tradesbackloggedso I’mpyramidinglargerriskontheheelsofmygains.Ryan:ItfirststartswiththecompanyhavingallthecharacteristicsIlookforinagreatwinning stock.Second, if the stock is ina stronguptrendwith littlesellingwhenitcorrects,thatgivesmethemostconfidence.Finally,ifweareinabullmarket,thathelpsallstocksachievehigherpricesandwouldgivemeaddedconfidencetotakelargerpositions.Zanger: Having years of trading helps. Identifying aggressive stocks withgreat volume characteristics and tremendous earnings can’t bebeat.But beingabletorecognizeeventhemostsubtlebullishandbearishchartpatternsisabiglegupthathelpsmyconfidenceeverytime.Even a powerful runner breaking out can get into trouble early and flash a

bearishchartpatternthatgivesaheads-up.Imightreduce30–50%ofthatstockposition right away or get out completely based on something subtle in thatchart’sbehavior.IfIsellouthalfmypositionaftera$20moveup,I’velockedina$20gain.If

thestockcontinuesup,I’mstillmakinggoodgainsontheremaining50%ofthatposition. If the stock caves, I’ve locked in a $20 gain on 50%ofmy originalinvestment. Nothing helps your confidence better thanwin-win scenarios likethiswhenyouhaveaperceivededgeinreadingthecharts.RitchieII:Success.ThisisaconceptthatMarkMinervinihaspoundedinto

theheadsofhisfollowers,andI’vebeenfortunatetograspitearlyinmycareer.It’salwaysmucheasier to tradelargerontheheelsofsuccess,at leastforme.Andthatreducestheriskofruingoingforward.Inaddition,thecombinationofhaving done my homework and being prepared takes out the emotion fromtradinglarger.

S3-9:Howdoyoudeterminethe“quality”ofasetup?Ifonestockismoredeservingofcapitalversusanother,howdoyouquantifythat?Ordoyoukeepallpositionsizesequal?Minervini:Itrytokeepthemequal,butitdoesn’talwaysworkoutthatwayforseveralreasons.Firstisliquidityandvolatility;ifthestockisreallysmallortoo volatile, I’mnot going take big risk.The other ismy trading rhythm; if Ihavenotexperiencedsomesuccessful trades,I’musuallytradingsmaller,eveninnamesthatlookdeserving.The“quality”ofasetupisdeterminedbypriceandvolume action and earnings power. The better names have stronger priceperformanceandthestrongestearningsandsales.Ryan: After scanning probably millions of charts over my 40 years ofinvesting,thereisacertainlookthatagreatstockwillhavebeforeitbeginsitsmove.Itisusuallythesymmetryofthepriceactionandthetighttradingrangeofthestockinthelastweekortwobeforeastockbreaksoutthat,together,givemetheconfidencetobuyafullpositionquickly.Thestockalsohastohavestrongfundamentals togo alongwith theprice action togiveme the confidence thatthiscouldbeabigwinner.Zanger:Volatilityisaprimaryfactoralongwithasolidbase.Howlongthebase is andwhether it’s a veryhigh-level extendedbaseor a first- or second-stage base are strong secondary considerations. Stocks that can make largeintradaymovesare stocks thatqualify formymoney.Thebigger thepotentialmovefromthatsolidbase,themoremoneyIwanttodevotetothattrade.Morethanlikely,thestockhasgivenmeplentyofsignalsthatabigmoveiscoming.RitchieII: Icertainlydon’tkeepallpositionsizesequal,and inprinciple I

believe you should have the most capital in the ideas you have the mostconvictionin,regardlessofassetclassorstrategy.QuantifyingthequalityofasetupistrulyanartandoneI’mtryingtogetbetteratallthetime.GenerallyIlookattechnicalsfirst,thenfundamentals,andthenthegroup.The

bestsituationshaveallthree;however,thatdoesn’tnecessarilymeanIwilltakethe largestposition.That alsodependsheavilyuponmy recent trading results,myoverallexposure,andliquidity,assometimesareallygoodsituationmaybeaverysmall-capsituation,whereIcan’thaveahugeposition.ButI’llputonasmuchasI’mcomfortable,becauseaboveallelse,IstillwanttobeabletogetoutofasituationveryquicklyifIneedto.

SECTIONFOUR

TechnicalAnalysis

S4-1:Howdoyougobeyondbeinginterestedinanametoactuallybuyingit?Whatspecificallydoyoulookforwithregardtopriceandvolumebeforebuyingastock?Minervini: A volatility contraction in price accompanied by a dry-up involumeora sellingvacuum.Tomakebigmoney fastwithmomentumstocks,youmust learnhow topositionyourself in the strongestpartof themoveandtime the tradecorrectly.Afteryouspota stock ina strong trend, thevolatilitycontractionpatternorVCP,isthebestwaytodetermineifastockhascarvedoutalineofleastresistancewiththepotentialtoblastoffthroughapivotpoint.Foradetailedexplanationof this setupandhow to trade it,youcould refer to thechapter“APictureIsWorthaMillionDollars”inmybookTradeLikeaStockMarket Wizard: How to Achieve Superperformance in Stocks in Any Market(McGraw-Hill,2013).Ryan:Ilookforverystablepriceaction.LikeMark,Idon’tlikevolatilityinthepricemovementbeforeIbuy.Thereshouldbeaperiodofaweekormoreofveryquietandverytightpriceactionbeforeastockmakesamove.Thatstabilityusuallyoccursafteralargerbasehasformedandisintheupperhalfofitschartpattern.Zanger: In thesimplest termspossible, it’sallaboutpriceactionduringtheday.A lackof standout behavior in a stock’s price behavior is a clue that thestockisanunderperformer.Touseananalogyfromthehorseracingworld,I’mlookingforthoroughbredslikeSecretariat,Affirmed,orAmericanPharoah,andtheycomealongrarely.Soyouverymuchneedtostayintunewiththemarketeverydaytohoneyourskillsforpickingoutthesemassivemoversandlearntocatchthemearly.

RitchieII:ThegeneralruleofthumbformeisthatIwanttoseeastockthathas acted in an orderly manner where it is in an uptrend followed by aconsolidation period. Ideally it won’t have a good deal of volume in theconsolidationperiod,and ideally ifvolume isbelowaverage, then that isevenbetter.Actually pulling the trigger is just amatter of decidingwhich names IknowIwanttopurchasewhentheyreachcertainpricepoints;othersImaywanttowatchabitfirst.Butasageneralrule,Ihavethesedecisionsmadebeforethedaystarts.Iftheactionduringthedayisreallygood,Imaybemoreapttoputonmore

riskandbuymorepositionsifcurrentonesareactingwell,andconverselythenIlet the price action dictate whether the initial day’s plan should be moreaggressiveorconservative.

S4-2:Wouldyouinvestinastockwithunfavorablefundamentalsinaverybullishenvironmentiftechnicalpriceactionisgood?Minervini: Many of the best trades occur when you have fundamentals,technicals, andabullishgeneralmarket all inyour favor.So I try to focusoncompanies that have solid fundamental and technical characteristics during ahealthymarketenvironment.However,lifeisnotperfect.Stocksthatsetupwelltechnically,inamannerIrefertoas“unexplainedstrength,”areoftengoodrisk-rewardplaysbecause theyare lessobviousandnotas likely tobe“crowded.”So,yes,Iwilltradestockswithalackofapparentfundamentalswhenthechartisreallystrong.Mostof the timewhen I ignore surface fundamentals, the stock is inavery

high-momentum situation, and the chart is saying that something really big isdefinitelygoingon.ThiscanoccurinbiotechandmedicalstocksthatoftentradeonthepromiseofanewdrugortheapprovaloftheFDA(U.S.FoodandDrugAdministration).Ryan:Imightbuysolelyonthetechnicals,butthatwouldbejustforatrade,and I don’t do that too often. Iwant both the fundamentals and the technical

aspectsofastocktobegoinginthesamedirection.Ifbotharepresent,itcouldpowerastockforanicelongmoveformonthsandevenyears.Ifthetechnicalsareonlypresent,theearningsbetterstartcominginsoonbecausethemoveisnotgoingtolastlong.Idon’tday-trade,andIliketomanageapositionaslongasthestockisinanuptrend.Ifyouhaveaveryshort-termtimeframe,thenmaybeyoucangowithjustatechnicalsetup.Zanger: You bet I would! AsMark pointed out, some of the best growthstocksmoveupwell in advanceofgoodearningscomingout.FirstSolar Inc.(FSLR)wentpublicinlate2006ataround$24ashareandhadnoearnings,andyetthestockranhardallthewayupto$300pershareinjust18monthsbeforesolidearningscameout.Bytheway,thoseearningsbackthenwereincredible,andtheyprovedtobe

thetopofthatstock’smoveatjustover$300ashare;andsincethen,thestockhas come down to $40 in 2015. A stock’s movement often precedes goodearnings,thoughthatisnotalwaysthecase,especiallyinthelatestagesofabullmarket.RitchieII:Ibuyunderbothconditions.Iliketohavethefundamentals,butifthechartlooksreallygood,I’llbuyitevenwithpoorfundamentals.ToDave’spoint,mostofmystocksaretrades,notlong-terminvestments.

S4-3:Wouldastockwithpoorfundamentalsbutexcellentrelativestrengthtradingnearanew52-weekhighstillqualifyasaleader?OnecouldarguethattherehadtobesomefundamentalreasonforthehighRS.Minervini: Well, it would qualify as a price leader, which by definitionmakesitamarketleaderbecauseit’sbeenoutperformingthemarket.Amarketleadercanbemeasuredintermsofpriceaction,earnings,sales,etc.Iprefertohavealloftheabove,butasIsaidearlier,lifeisn’tperfect.The textbookdefinitionof amarket leader is price actionversus themarket

anditsindustrygrouppeers.Sometimesyouhavetheearningsonthetable,andsometimesyoudon’t.However,history shows that70%ofbigmarketmovers

have earnings on the table before they make a big move. If you’re tradingbiotechstocks,however,moreoftenthannot,earningsarenotonthetable.Ryan: Yes, you can say it is a leader based on price. However, the morereliableleadersarethosethathavebothstrongpricestrengthandgoodearnings.Zanger:Itsurecouldqualify.AsMarkMinervinijustpointedout,thisisthecasewithmostbiotechstocks,asmanyofthemaremakingtremendousmoveswith no earnings at all. They are trading on future earnings of new drugs orcompoundstheyhavediscovered.Manystockscanbreakoutandrunuppriortostrongearningscomingout.As

has beennoted for a hundredyears ormore, themarketmoves up six to ninemonthsinadvanceofgoodeconomicnews,andstocksprettymuchdothesame.RitchieII:Absolutely, if a stock is “leading” in termsof relative strength,thenit’saleaderandit’sonmylistasapotentialbuy.

S4-4:Iassumeyourequirestocksyoubuytobeinapriceuptrend.Howdoyoudefineanuptrend?Minervini:Didyouevershowupas the firstoneataparty? Ibetyousataround for a while waiting for things to really get going; the party probablydidn’tpickupuntilaftereveryonewasthere.It’sthesamewithtrading.Ineverwanttotrytobethefirstonetothepartyinastocktrade.Why?Iwanttoseesome interest in the stock,preferably frombig institutional investors.Before Ijointhe“party,”Iwanttomakesurethere’sapartygoingontojoin!Specifically,Inevergolongastockthatistradingbelowitsdeclining200-day

movingaverage(assuming200daysoftradingexist).Nomatterhowattractivethe fundamentals look, Iwon’t consider buying a stock that is in a long-termdowntrend, because going long stocks in long-term downtrends significantlylowersyouroddsofowningabigwinner.Ifyouwanttoincreaseyourchances,you should focus on stocks that are in price uptrends. Momentum stocks bydefinitionareinstrongpricetrends.Ryan: About 90% of the stocks I buy are in strong uptrends. I define an

uptrend as a stockwith its 50-daymoving average above its 200-daymovingaverageandbotharetrendinghigher.Evenstrongeruptrendscanbedefinedasthe20-daymovingaverageabovethe50-day,andthe50-dayisabovethe200-day moving average. I tend to concentrate on those stocks that are in stronguptrendswithanIBDrelativestrengthgreaterthan80.OccasionallyIbuyastockthat isa turnaroundsituation.ButIonlybuythat

turnaroundasthestock’sdowntrendisover;thepricehasgonesidewaysforatleast three tosixmonthsandstarts to turnup.Arecentexample isLululemonAthleticaInc.(LULU)asitturnedupinearlyDecember2014.Insixweeks,itwasup40%.Atthetimeofmypurchase,thestockwastradingabovethe50-dayandthe200-daymovingaverages.The50-daymovingaveragewasinaninanuptrend,andthe200-dayhadflattened.Zanger:Uptrendsaremybestfriendandcertainlymypreference,butIhavebought stocks coming up from inverted head-and-shoulders patterns, whichhappens after a stock has finished a series of lower lows and lower highs.Uptrendingstockstomearestocksthatarestairsteppinghigherwithaseriesofhigherhighsandhigherlowswithsolidtightbasesinbetweenthesesteps.Ritchie II: Yes, I never break this rule. If a stock is not in a long-termuptrendwhereit’stradingaboveits200,150,or50-daymovingaverage,Iwon’tconsiderit.

S4-5:DoyouuseanyindicatorssuchasstochasticsorMACD(movingaverageconvergence-divergence)orATR(averagetruerange)?Minervini: None. Just price, volume, and a few moving averages forsmoothingandcompanyfundamentals,mainlyearnings,sales,andmargins.Butwhat’simportantisthatyouusewhatworksforyou.Ifusingstochasticsworksforyouoriftradingbythewaythestarsalignintheskyworks,great!Makeityours,andbethebestyoucanatit.There’scertainlymorethanonewaytoskinthecat.Ryan: Ido lookat stochasticsandMACD.Theyaddadditional information

aboutthestrengthofamove;butIrelymostlyonthepriceandvolumeactioncombined with the fundamental aspects of the company. I don’t want tocomplicate the issue.Youcan start lookingat somany indicators thatyougetyourselfconfused.Keepitsimple.Zanger: Iuse theAIQTradingExpert’sSK-SDmore thananyother.SinceI’ve used it for 24 years, I’m very comfortable with it, and it’s much morereliableformethanMACD.IneverusedATR,soIcouldn’tcommentonthat.Ritchie II: I find the ATRmeasurement to be quite helpful in short-termfuturestrading,butIuseitonafairlyshorttimeframe,becauseIwanttoknowwhatisthenormalvolatilitylevelthatthemarkethasbeentradingwithinduringthelastfewsessionsandspecificallywhetherthatlevelisadvancingquickly.Iwanttoknowwhatkindofnoiseisnormalinamarketinhopesofplacingmystops outside that level, and ATR is what I tend to use. I don’t have anyexperienceusingMACDorstochasticindicators.

S4-6:Whatarethemostimportanttechnicalconsiderationstobuyastock?Minervini:Theprice andvolumeactionaswell as the relative strengthofthe stock versus the market and versus other stocks in the same group.Ultimately,theverdictofthemarketisallthatmatters.Evenifthefundamentalsare strong, I’mnotgoing tobuya stockunless thepriceandvolumeaction isconstructive.Ryan: The price pattern and volume of a stock are my most importantindicators.TheyarethefirstthingsIlookat,andtheycarrythegreatestweightwhen I make my buy and sell decisions. The relationship between price andvolumegivesmethebestindicationofthefuturepricedirection.Zanger:Themostimportantindicatoristheoverallmarkettrendingupwithhigherhighsandhigherlows,andthesamegoesforthestocksthatIlooktobuy.Nextwouldbeawell-definedbaseandthenthestrengthofthegroup.Ritchie II: I don’t use many technical “indicators,” just mainly price and

volume,althoughthenextbestthingisthestock’srelativestrengthrating.

S4-7:Doyouprefertobuymomentumnamesonpullbacksoronbreakouts?Minervini:Mostofmypullbackbuysareenteredwhilethestockisstillinabase, before a breakout even occurs. Sometimes I buy on a pullback to aprevious breakout level, and more rarely I buy on a pullback to a movingaverage like the 50-day after a breakout, but I’m hoping to already be in thestockbeforethatoccurs.Ibuywhenevertherearegoodlow-risksetups—breakoutsorpullbackbuys—

whateverisworking.Itrytofindthecycle’stechnical“theme”andthenplaythemarket’stendencieswithinthattheme.Thekeyistomakequalitydecisionsoneachtrade.Youdon’twanttotaketoomuchrisk,whetherit’sapullbacktradeorabreakout.Ryan: It really depends on the type ofmarket you are in. If it is a choppymarket, breakouts have a tendency to fail or notmakemuch progress. In thatcase, I buymore pullbacks. In a strong uptrendingmarket, breakouts tend tokeepgoing,andifyouwaitforapullback,youcouldmissabigmove.Zanger: Breakouts are best, and the larger gains are to be had there, ofcourse.ButifImisstheoriginalbreakout,thenIwillhavenochoicebuttobuya pullback to get in. This is where the 10-day moving average comes in, oralternatively,usingshort-termtimeframessuchas5-minutechartsor30-minutecharts.Ritchie II: I prefer breakouts because the best situations don’t often pullbackmuch, so Iwouldmuch rather pay up and buy a breakout. That doesn’tmean Iwon’t buy a pullback, but generally Iwill only buy a pullback after astockhas successfullybrokenoutandhas thenpulledback inanorderlyway,oftenseveraldaystoevenafewweekslater.

S4-8:Howdoyoudefineabreakout?Minervini: Well, a technical breakout is when a stock trades above a

predetermined price level, usually coming out of a base or consolidation. Ifyou’reusingthepreviousday’shighasabuypoint,thestocktradingabovethatlevelwouldconstituteabreakout,soitreallydependsonwhatstrategyyouareusingandwhatlineinthesandyouconsiderimportant.Ryan:Abreakoutisastockemergingoutofabaseorsidewaysconsolidation.I like a base to be at least fourweeks or longer.As the stock breaks out, thevolumeshouldbelargerthanaverage.Thevolumeshouldincreaseatleast25%ormore. The bestmoves startwith very big increases in volume of 100% ormore.Zanger: It’swhen a stock hits the pivot area of the base and explodes outfromitonmassivevolumeandneverlooksbackatthepivotarea.Itmightrunfor twoor threedaysand thenrestaweekorsoand thenacceleratehigheronsizablevolumeagain.Stocksthatvacillateatthebreakoutareatendtobepronetofailureorhaveweakupsidepotential.RitchieII:Thewordbreakout isagenerictermthatrefers topricemovingabovesomething. Itcanbeabreakoutabovea trendline,anoldhigh,orsomeotherkindofpivot. Ideally I’d like tohavepricebreakoutsoccur for all threeexamples above; however, at a minimumwould be the stock breaking abovesome kind of pivot. Additionally, stocks can have fundamental breakouts aswell,forexample,abreakoutofearningsandsales.

S4-9:I’vebeeninvolvedinmanyfalsebreakoutsonlytohavethestockreturntowithinthebaseandconsolidatemuchlonger.Wouldyousaythatadding10–20centstothebuypointwouldbeaneffectivetechniquetoavoidgettingsuckedintofalsebreakouts?Minervini: I don’t usually buy just a penny above the buy point. I willgenerallywaitforthestocktotrade5,10,oreven20centsabovethepivotlevel.TheonlytimeIgoingunsblazingiswhenthingsareworkingreallywellandI’mholding profitable trades.Then Imay loosen up a bit and give stocks thebenefit of the doubt. Otherwise, I usually wait and would rather pay a little

higherpricetomakesurethestockisadvancing.Buteventhen,thestockcouldturnbackdown.Therereallyisnomagicnumber.Withthatsaid,ifIbuyastockanditfallsbackandconsolidateslonger,Iwill

usuallystaywiththenameaslongasitdoesn’tstopmeoutorsomethingmoreattractivedoesn’tturnup.Keepinmind,youdon’thavetobuyeverythingatoneprice.Iusuallyscaleinandaddasthepositionstartsworking.Thisisthesubtleartofexecutingyourtrades.Ryan:No,Iwouldstickwiththeexactpriceyoudeterminedforthestocktobreakout. If recentbreakoutshaven’tbeensuccessful, thenyoumightwant tostartwith a smaller position and then addquickly if the stock closeswell andcontinueshigherthenextday.Youdon’thavetodoallyourbuyingononeday,but adjust the sizeof yourpositionbasedon the strengthof the stock and themarket.Zanger: If the market is choppy and not many stocks are getting solidbreakouts, then yes, Iwould raise the bar and not buy verymany shares, as ImighthavetocheckoutjustasfastasIgotin.RitchieII:Inmyopinionthereisnotechniquethatwillallowyoutoavoidfalsebreakouts; that is themain inherent risk in tradingbreakouts—theyoftenfail.Raisingthetriggerareaabitisn’talwaysabadidea;however,Ithinkitisverystockspecific.Forexample,Iammuchmoreapttowaituntilthepriceisfirmlybreakingout

inamoreliquidnamebecauseprevioushighsorlowstendtobemoreobvioustechnical points and aremore prone to be shaken out or run through by otherparticipants,marketmakers,etc.This is why a breakout trader should always be willing to “pay up” to a

degree,becausethebesttradesbydefinitionwon’tbelosersevenifyouhavetopayuptogetinthem.Theywillstillgetawayfromyouwithrelativeeaseiftheyaretrulylegitimatelybreakingout,anditisultimatelythebreakouttrader’sjobto usewhatever tools and techniques possible to sift out the stocks that aren’t

reallybreakingoutinearnest.

S4-10:Doyoueverbuildapositionduringalow-volumeconsolidationorsidewaysmovement,ordoyoualwayswaitforthestocktobreakout?Minervini:Igenerallywaitforthestocktobreakoutorattheveryleaststartturningupthroughapivotpoint.Idon’twanttositwithdeadmoney,soevenifItrytogetinbeforethebreakout,Ialwaysrequirethestocktobemovinginthedirectionofthetrade.Ifyou’replayingforadecentmove,youdon’tgainmuchofanadvantagegettinginafewpenniesoreven10centsearly.Sowhat’s thepoint?Ryan: Iwait for thestock tobreakoutofasidewaysmovement. Ifyoubuywhenthestockisstillinabase,youruntheriskthatthestockwillactuallybreakto thedownside. I think it’sbetter towaituntil a stockbreaksout. Ifyoubuyearly,youdon’tknow if itwill actuallybreakout to theupside. It couldhavesomebadnews,orthemarketcouldturndown,andyouarethensittingwithaloss.Zanger:I’llwaitforthebreakout90%ofthetime.Oncevolumedriesupandthestockappearstobeconsolidating,youjustneverknowwhenitmightgethitbyadowngradeanddrop$10–$20;oritlowersearningsguidance,andthestockcan drop like a swatted fly and never rebound. It’s always best to wait until“judgment day”when the breakout tells youdefinitively that there’s plenty ofgas in the tank—or that the tank is empty.Whyhaveyourmoney sitting in astockthatisgoingnowhere?Saveyourselfalotofguessingandbuyastockthatisactuallybreakingout.Ritchie II: If I’m going to add to an existing position, it’s onlywhen theconsolidationorsidewaysactionisresolvingitself.Again,Iwanttoseethepriceaction to be confirming; so I’d rather buy more as it’s breaking out of theconsolidationperiod.This tomeisreallyafunctionofpersonality,asbothareviableapproaches.Ioftenbuyalittleonthewayupwhilethestockisstillinitsconsolidationperiodbeforeitofficiallytriggersabreakouttonewrelativehighs,

atwhichpointImayaddmore.

S4-11:Howdoyouassessastockthatisconsistentlymakingnewhighsonlowervolume?Minervini:Poordemand.ButIwouldn’tsellastockjustbecauseit’sgoinguponlowvolume.Stockscansometimesgoquiteadistanceonanemicvolume.Ryan:Ingeneral,youwantastocktoriseonhighervolumeandpullbackonlower volume because the buying and selling by institutions is what movesstocksinthemarket,andtheinstitutionscan’thidethefactthattheyhavetobuyinsize.Themostimportantareatoconcentrateoniswhatvolumeisdoingatkeypoints like breakouts to new highs, breakdowns frombases, and evenwhen astockundercutsapreviouslow.Whenastockisbreakingoutofabase,Iliketoseehugevolumethatismany

timesgreaterthantheaveragevolumeduringthelast50days.Ialsoliketoseethatthevolumecontinueshigherforatleastthreedays.Thatwillbeasignthatthelargeinstitutionsandhedgefundsarealsobuying.Ifthestockbreakstonewhighsonvolumeforonedayandhasno follow-through, then that indicates tomeitwasjustabunchoftradersplayingthenewhigh.Oncethestockhashadanicebreakoutforanumberofdays,thenthevolume

cangobacktoaveragedailyvolumeorevenlessthanaverage.It’slikearocketblasting off; you need lots of fuel to get it off the launchpad, but once it’s inorbit,itdoesn’tneednearlyasmuchvolumetokeepitgoinghigher.Zanger:Many of the best-moving stocks of all time break out onmassivevolume,andthemoveupcouldtakethreetofourmonthsbeforebuyersstarttodryup.Makingnewhighsonlowervolumeisanaturalpartofastock’smove.Insuchacase,mostof thestockwillhavebeen takenoff themarketby folkswithearlyknowledge.Thepeoplewhoshowuplatetothepartybuywhatlittlestockisleft,butby

thistime,whichisusuallyanywherefromthreetoeightmonthsintothestock’srun,thoseearlybuyersarereadytolockintheirgains.Sellingcomesquicklyat

this stage, and those late to the party get burned as those early institutionalbuyersstarttosell.RitchieII:I liketolookatvolumeinconnectionwiththepriceaction.Forexample, if a stock breaks out on huge volume but only closes upmarginallyhigher, thattellsmetherewasalmostanequalnumberofbuyersandsellersatthosenewlyhighprices,whichmeansthebreakoutisprobablysuspect.Astockmaking higher highs on low volume isn’t bad; after all, price is king forme,althoughImaybelessapttoholdasituationlikethatforabigmoveifIfeelthevolumeisn’tthere.

S4-12:Ifastockopenswithinthepriorday’srangeandadvancesbeyondyourbuypoint,butitshowsaverageorevenlower-than-averagevolumeattheendoftheday,wouldthatbeasignalforcaution?Minervini:Notnecessarily.Iwouldn’tsellastockjustbecauseitbrokeouton lowvolume.Sometimes thevolumecomes in thenext dayor several dayslater.Inthatcase,Iwouldliketoseethestockfollowthroughonhighervolume.Ontheotherhand,ifthebreakoutwasonlowvolumeandthenthestocksoldoffonhighvolume,thatwouldusuallygetmetoselloratleastreducemyposition.Ryan: Imightwait for the close to seewhat kind of volume has traded tomakemydecision.Optimally,Iwanttoseevolume;thebiggerthevolumeandthelongeritlasts,thebetteritis.Zanger: Volume iswhatmakes the stocksmove; so, yes, if it had lighter-than-normalvolumeonabreakoutday,Iwouldpass.RitchieII:No,ifthestockgoesbeyondmybuypointandshowsverylittlepricefollow-throughorvolume,thenthere’snoreasontodoanythingotherthansit on my hands. At this point, the price action is sort of agnostic; it’s notconfirmingnordenyinganything,andmarketsoftenactthisway.

S4-13:Howdoyouevaluatevolumeifastockstartsmovingearlyinthedayandthereisn’tmuchvolumeinformationyet?Minervini:IntradayIextrapolatethevolume.Ifit’s10:30a.m.andastock

that trades 500,000 shares per day has already traded 175,000, that’s theequivalentofthestocktradingaround1milliontotalsharesfortheday.Inthatscenario,Iwouldbuy.ThenIwouldchecktheend-of-the-daytallytoseeifthevolume remained strong and continued to keep pace with the level when thestockstartedmoving.Ryan:Ifthebaseisperfect,Imightstartwithasmallpositionandseeifthevolume picks up by the close of the trading day. I want to see large volumebecause that isa sign thatmutual fundsandhedge fundsarealsobuying.Toomany stocks these days have one-daybreakouts on light volume and then fallbackintothebase.Zanger:Ihaveatoolthatrunsaratioofthestock’svolumehistory,andifmyratioiswayabovenormal,thenIstarttomovein.Thegreatertheratio,themoreconfident I am about moving into the stock. By the end of the day, volumeshould be 50% or more above its recent history, or my trade would becomesuspect. eSignal can provide you with my ratio tool known as the ZangerVolumeRatio(ZVR)onmostupdatedeSignalprograms.RitchieII:Thereisnoexactscienceto intradayvolume.Youcandosomebasicmathtoextrapolateagoodestimate;forexample,ifithastraded50%ofitsaveragedailyvolumeinthefirsthour,youcanmakeagoodassumptionthatthestock is going to have awell-above-average-volumeday.However, youneverknowhowconstantthevolumeflowisgoingtobe,andit’salwayshighestattheopeningandclosingoftheday.Themoreimportantthingearlyinadayistoseeifthestockisbeingboughtinearnest—suchasifitbreaksoutearly,youwanttosee offers being gobbled up, which shows that someone is taking all theavailablesupply.

S4-14:Wouldyoubuyastockevenifthereisn’tlargevolumeaccompanyingthebreakoutorpivotandhopethevolumecomesinlater?Minervini:Well,intradayyoudon’talwaysknowifthefinalvolumetallyisgoing tomeet aminimum requirement if the stock starts tomove early in the

day.Youcanextrapolate,but evenwith that, thevolumecouldbe light in themorningandpickup later in thedayafteryou’realready in. Iusuallybuy thestockonpriceactionandthenlookforconfirmingvolume.Icanalwayssellitifthingsdon’tprogressfavorably.Ryan:Again, if the fundamentals areverygoodand thebase is just right, Iwill buy a smaller position and then add to it if the volume and the pricecontinuetorise.Zanger:Volumemust be rushing inwhen I’m buying, and the stockmustfinish thedaywitha largepercentage increase involume,or I’mout. It’s thatsimple. There is no way to buy or sell a large number of shares onminimalvolume.RitchieII:Absolutely,especiallyifyouareearly,thereoftenwon’tbelarge-volume buying, so I’m happy to let the trade play out and see if volume issupportiveincomingdays.

S4-15:Whywouldyoubuyastockwithouthavingvolumeconfirmation(determinedattheclose),ratherthanwaituntilvolumecomesintothestockandbuyitthen?Minervini:BecauseIcouldmissthemove.Manystocksstartoffslowlyandthenpickuppaceaftertheyhavealreadymovedup.Ryan:Yes,Markiscorrect.Whatcanhappenisthevolumeisverylightasthestockisgoingthroughthebuypoint,andthenthevolumecomesinlaterinthedayoreventhenextday,andbythattimeitmightbetooextended.SoIwouldbuy,butitwouldbeasmallerposition,andnotadduntilthevolumecameintothestock.Zanger:Whenvolumestarts tosurgeearly in thedayandthestockcrossesthebuyarea,I’min.Bytheendoftheday,volumesshouldconfirm.Ifyouwaituntilvolumehasconfirmedattheendofthedayforyourentry,thestockmightbeup$10andfarpastthebuyarea.RitchieII:Yes, I don’t everwait for volume confirmation. I like to see it

afterthefact,ofcourse,andconfirmationmayleadmetoadd,butIdon’twaitforitinitially.

S4-16:IfvolumedoesnotcontinuetocomeinandmovethestockhigherafterXnumberofdaysafteryouboughtit,wouldyouconsidersellingtheposition(i.e.,atimestop)?Minervini:Ifit’sgoingupandI’matadecentprofit,Iwouldprobablystaywithitevenifthevolumeislow.ButIwouldwatchitcloselyandbelikelytosellitmorequicklyshouldthestockstarttoreverse.Ryan:Ifthestockisataprofitandthestockhasn’tshownthekindofvolumeIwaslookingfor,Iwouldmovemystopuptothebreakevenpointandgivethestockmoretime.Zanger:Thefirsttwodaysoutofthebasearethemostimportantinregardtovolumeandpricebehavior.Afterthatperiod,holdingwoulddependonthedepthof the volume dry-up followed by the price behaviorwhen volume recedes. Ihavenothingpresetinmymindlikeatimestop,sinceIonlyrespondtovolumeandpricebehaviorindependentoftimeafterthosefirsttwodays.RitchieII:Iviewpriceasking,soevenifvolumehasn’tcomeintothestockbutthepriceisholdingupormovinghigher,thenIwillstickwiththetrade.

S4-17:Doyouhaveanyvolumerulesthatyourequireonabreakoutday,suchasvolumegreaterthanXnumberofdays’average,ordoesithavetobegreaterbyXpercent?Minervini: I like to see the volume eclipse its own50-day average. Someusea50%increaseabovethe50-dayaverage;themorevolume,thebetter.Ryan:Yes,thebigger,thebetter.Iliketoseethevolumeupatleast25%,but100–200%increasesinvolumeshowmethatlargeinstitutionsarealsoactivelybuyingthestock.Zanger:Agoodruleofthumbistolookforavolumesurgebytheendofthedaythatisgreaterthan50%ofthestock’s20-dayor30-dayaverage.Icurrentlyusethe20-dayaveragemyself.

RitchieII: I don’t have hard rules; but ideally Iwould like to see above-averagevolume.

S4-18:Howpatientareyouwithpullbacksshortlyafterthebreakouttoorjustbelowthebreakoutarea?Minervini: It is common for a stock topull back to thebreakout area andevenundercut it; thiswillhappenabouthalf the timeeveninsomeof thebestnames.Ofcourse,Iwouldpreferthatthestockfollowsthroughforseveraldaystogetmeataprofit rightaway; thestrongeststocksoutof thegatewilloftenturnouttobethebiggestwinners.However,aslongasthestockholdsmyinitialstop,Iusuallystaywiththetrade.Ioftenmovemystoptomybreakevenpointonce the stockmoves up a decent amount. Until then, I wait for the trade toprovemerightorwrong.Ryan:Ifthestockdidn’tpullbackonhugevolumeretreatingintothebase,Iwillgiveituptoa5–8%loss.Ineverlikeitwhenastockbreaksoutandquicklyfallsbackintothebase.Thatisnotasignofastrongstock.Iwantbreakoutsonstrongvolumethatcontinueforatleastthreeconsecutivedays.Thatisthesignofbiginstitutionalbuying.Zanger: Isell it.That’sexactlyhowIhandle thatsituation.Awinningracehorseneverbacksintothestartinggateafterthegatehasopened.Neithershouldagreatwinningstock.RitchieII:Apullback to thebreakoutarea isprettynormal, so Idon’t cutthingsoutsolongastheyhaven’ttakenoutstoplevels;breakoutlevelsareoftenrevisited,andIconsiderthatnormalaction.

S4-19:Howmanytradesetupsorchartpatternsdoyoutypicallytrade?Minervini:Maybesixoreight.Butmostarejustpermutationsofmybasicbreakout and pullback buy techniques. The main thing I look for is VCPcharacteristics; that’s a contraction in volatility from left to right during theconsolidationphase.Ryan:Ibasicallysimplifyitdowntotwo,breakoutsandpullbacks.Don’tget

confusedbyall thedifferentformations.Youdon’treallyhaveto lookforcupwithhandles,orsaucers,or“W”formations.Youjusthavetodrawalineacrossthetopofwheremostofthestock’stradinghastakenplace.Thenyoubuyasitmovesthroughthatline.Itisassimpleasthat.Ialwaysliketoseeaverytightpricepatternbefore the stockbreaks tonewhighs.Buyingpullbacks are a bitmorecomplicatedbutofferanotherentrypointtogetaboardaleadingstock.Zanger: Well, I can’t say I’ve counted them all but somewhere in theneighborhoodofeightorso.Mostlyflatchannelsorbullflagswithafewcup-and-handle patterns every now and then. Descending channels work too, butusually there are frequent shakeouts going on when they break to the upsidebeforetheyreallygetgoing.Ritchie II: I trade probably four to five different variations on the sameoverall theme, that being stocks in long-term uptrends coming out ofconsolidationperiods.Thevariationsthemselvesmaybeinhowlongthestockhas consolidated, what the different pivot- or resistance-point formations are,howvolumeisacting,howclosethestockistonewhighs,etc.

SECTIONFIVE

Fundamentals

S5-1:Doyoufindstockswithproperfundamentalsandthenlookatthechartsorviceversa?Minervini:Ilookatthechartandthelong-termtrendfirst,becauseI’mnotgoingtobuyastockevenifithasgoodfundamentalsifthechartisbadandthestockisinadowntrend.Ryan:Irelyheavilyonthechartofacompany.Iusuallygothroughhundredsifnot thousandsofchartseveryweek lookingforapropersetup. If IseewhatI’mlookingforonthechart, thenI lookto thefundamentals tosee if theyarestrong. I want both the fundamentals and the technical characteristics of thestocktobeinanuptrend.Ihavemuchmoreconfidenceinholdingastockthathasgoodfundamentals than if I’mbuyingbasedsolelyonagoodchart.Thereare somanystocks tochoose from,whynotgowith theone thathas thebestcharacteristics.IfIhearofacompanywithgreatfundamentals,IalwayschecktoseeifthechartconfirmswhatI’mhearing.Zanger: I look at the charts first since chart patterns have led me to mybiggestwinners.Ifastockhasgreatfundamentals,morethanlikelyithasreallygood earnings and revenue growth. It simply follows that at some point thisstockwillhaveareallygreat-lookingchartpatternthatgrewfromthosestrongfundamentals.RitchieII: I always look at charts first, because if the stock doesn’tmeetsome basic technical criteria first, then I won’t even consider purchasing itregardlessofthefundamentals.

S5-2:Beforeyoubuy,howmuchtimedoyoutypicallyputintoresearchingastock(fundamentals,newsstories,chart,etc.)?

Minervini:Ifit’sanamethatI’mnotalreadyfamiliarwith,Iwillputinasmuch timeas Ineed to investigate theearnings, recentnewsstories,andothercompanies in the same industry group. However, many stocks are names Ialreadyknowandhavebeen following, so it’s just amatterofwatchingwhenthe technical picture develops into an entry point and monitoring earningsreportsalongtheway.Ryan: Because I take a big-picture view of the fundamentals and don’t getcaughtup in theminutedetailsofeachearningsreport, itcouldbeamatterofminutesformetomakeadecision.ButIamusuallymoresuccessfulifIspendanumber of hours researching the fundamentals, listening to conference calls,investigating the company’swebsite to reallyget toknowwhere the companyhasbeenanditsfutureplans.Zanger: Not much time at all, to tell you the truth. I used to do lots offundamentalwork, but I foundmyselfwanting tobelieve in that stock since Ihad done so much work on it. All it took was two spectacular blowups thatnearlywipedmeoutinthemid-1990s,andfromthatpointforwardIgavethatup.Nowit’sallaboutpricebehaviorofstocks,andIletthemarkettellmewhich

stock to own andwhich stock to avoid.That constitutes 80%ofmy research.Theother20%isreviewingearningsonthebest-movingstocksinthemarket.Iusuallyfindtheydo,infact,haveverystrongearningsandrevenuestosupportthepricebehaviorthatcaughtmyeye.RitchieII: This depends upon howgood I consider the technicals to be. Iwill always do some preliminary research into the company, such as what itdoes,whatsectoritisin,andwhatitsearningsandsalesare,butitisn’talwaysextensive.

S5-3:Whatnewssourcesorresearchdoyouuse,andhowdoyouutilizenewsitemsinyourowntrading?Minervini:Itrytokeepoutsideinfluencestoabareminimumandhavemy

trading environment as “vacuum packed” as possible, meaning there are nooutsideopinionscomingin,justfactualdata.EverythingIneedtomakebuyandsell decisions is generated internally. I have subscriptions to a bunch of newssources,butIrarelyusemuchmorethanearnings,sales,andmargindata.YoucanuseYahooFinanceorBriefing.com.Ryan:Investor’sBusinessDailyismyfirstsource,becausethewholepaperisdesignedaroundidentifyingthebestgrowthstocksinthemarket.Ialsoreadtheeditorialpagebecauseitgivesyouaveryconservativeperspectiveonthenewsthatyoudon’tget fromalmostall theothernewsoutlets.Theeditorialsaresoconservative,theymaketheWallStreetJournallookalmostsocialistic!IalsoreadtheWallStreetJournalandtheLosAngelesTimes.Anothersource

I scan is Briefing.com, which is an online continuous news stream. I use thenewstogivemeadditionalinformationtosizemypositionsortoeliminatethementirely.Scanningthenewscanalsogivemeadditionalideasforinvestments.Zanger: IuseDowJones,YahooFinance,or sometimesAmeritradeonmysmartphonefornews.I’mlookingforupgrades,downgrades,andnewsdujourandmostimportantlycheckingtoseehowmystocksarereactingtothenews.Ifgoodnewsisoutandthestockdoesn’tmove,maybeit’stimetoreduce.Ritchie II: I generally use a combination of web-based market newsincludingbutnot limited tomarketwatch.com,YahooFinance,zacks.com,andcnbc.com.Idonothavefinancialtelevisiononintheoffice,andthatisarule.Iusually use the news services for stock-specific information such as earningsreleasedatesorresults,otherheadlines,etc.OnoccasionItendtogetafeelfromsomeofthemediaforgeneralsentiment.

S5-4:Howmanystocksdoyouresearchorrevieweachdayonaverage?Minervini:Ilookathundredsofchartseveryday,butasfarasdeepresearchintocompany-specific fundamentalsandnews,maybea fewperday. IusuallyknowmanyofthenamesI’mfollowing,sobythetimetheysetupaproperbuypoint,Ialreadyhaveabeatonthestory.Ofcourse,sometimesanewstockwill

justcomeoutoftheblue,andwehavetoscurryveryquicklytogetuptospeed.Ryan:Itdependsonthemarket.Iftherearealotofnewnamesstartingtosetup,Icouldbeverybusy.Iusuallytrytogettoatleastoneaday.Zanger:EachmarketdayIreviewthechartsofabout300to400stocks,andif it’s earnings season, I like to review asmany earnings as I can on leadingstocks.Thistypicallyrequires14hoursadayduringtheweekand5to7hoursonweekends.RitchieII:Iprobablyreview300to500stockcharts,andIprobablylookata handful (5 to 10) of stocks formore information onwhat they do and theirfundamentals.

S5-5:Doyoubelievethesamefundamentalforcesmovestocksastheydidmanyyearsago?Minervini:Absolutely! It’snotabelief; it’sa fact.Coca-Cola (KO) in the1930s looked very similar to, say, Monster Beverage (MNST) in the 2000s.Cokewas a small high-growth company at the timewith huge earnings and agreatchartpattern;fewpeoplehadheardoftheCoca-ColaCompanybackthen.In the 1980s, Wal-Mart (WMT) was a small company that traded less than50,000sharesperday.ThefounderSamWaltonusedtostandonasoapboxinfront of the stores greeting people.Now the stock trades 7million shares perday, and thecompanygenerates revenue inexcessof$100billionperquarter.Earnings that are driven by sales drive large stock moves. Always has been,alwayswillbe.Ryan:Yes,andit isallaboutearningsgrowthortheexpectationofearningsgrowth. That will never change because everyone wants to own part of acompany that’s becoming more valuable, and that is achieved with increasedearnings.Zanger:Earningsstilldrivestocks,asdo interest ratesandFed liquidity. Itwillalwaysbethesame.Ritchie II:This is hard for me to answer because I wasn’t trading many

yearsago,butIwillsaythatIdon’tbelievestockstradeonrealityintheshortterm.However, in the long term if a stock isgoing tohaveabigmove to theupside, I think fundamentalswill ultimately be driving it.A stockwill not beabletosustainalargeadvancewithoutcontinuedearningsandsalesexpansion.

S5-6:Whatfundamentalcriteriadoyoulookforwhenshortingastock?Minervini: Earnings deceleration could tip you off that a stock may betopping. If a stockgetshit reallyhardonanearnings report, Iwill sometimesshortasubsequentdeadcatbounce,ifthetechnicalsshowthestockisinastage3toppingphase,orbetteryet,inastage4decline.Ryan:WhenIshort,Iputamuchgreaterweightonthetechnicalaspectsofastock.Manyofthebestshortsshowtechnicalcharacteristicsofatoplongbeforethefundamentalsactuallychange.Ihaveseena50%declineinastock’spricebefore the next earningswere even reported. If a stock forms a top that lastslonger than three months, then you should see a slowdown in the sales andearnings.Zanger: I don’t short thatmuch, thoughdecelerating earnings is thekey toshortingstocks.Ihavehadsomemajorwinnersshorting,withoneverymassiveshort play in 2004 when I was short 160,000 shares of eBay (EBAY). InJanuary, at presplit pricingof $105, itmissed earnings andguided lower.Thestockgappeddown$20intheblinkofaneyeonweaker-than-expectedearningsandcascadedlowerduringthenextfewweeks.Earnings were already decelerating before that point, and the stock had

recentlybrokendownfromahigh-levelchannelatthe$120areaonconsiderablevolume.Thenithitthe100-daymovingaveragelinearoundthe$105areaandtried to bounce on heavy capitulation volume.After a brief bounce, it startedfadingdownhardagainoverthenextfewdaysbeforeearnings.Ican’trecallthelast time a stock was breaking down so fast on such massive volume intoearnings before then or since. This was my biggest short gain ever and mybiggestone-daygainonasinglestockever.

IshouldnotethattherehaveonlybeenafewtimesI’veheldstocksthroughanearningsrelease,andIwasshortineachofthosefewtimes—andgotverylucky.It’s beenmore than 10 years since I’ve held any stock long or short throughearnings.RitchieII: I don’t look atmuch fundamental data for shorting asmuch astechnical. Either way, I rarely short, although a stock that has had explosiveearnings,butwhoseearningsandsalesarebeginningtoflatlineorstall,isagoodplacetostartlooking.However,Iwouldnevershortonthosecriteriaalone.Thetechnicalpicturewouldhavetosupporttheshortposition.

S5-7:Howdoyoumeasureearningsmomentum?Minervini:ThereareseveralthingsIlookforwithregardtoearnings.Ilookforyear-over-yearquarterlyearningsthatareacceleratingsequentiallyduringthemostrecentonetofourquarters.Also,ifacompany’searningssuddenlybreakoutofarangethatishasbeeninforseveralyears,that’sanotherpositivesign.Ifearnings start to accelerate above the growth rate, that would also get myattention.Ryan:Ilookatthequarterlyearningsandnotonlyagainstthesamequarterayearbefore,butIalsolooktoseeif thereisanyaccelerationinthoseearnings(year-over-year) fromthe last two to threequarters just reported. Iwant toseethat the earnings are really increasing dramatically. A great example of thatcurrentlyisAmbarella,Inc.(AMBA).Itslastfourquartersofearningsshowanacceleration going from 19% to 42% to 84% to a 162% increase in its mostrecentquarter.Itssaleswerealsoacceleratingatthesametime.ThatisthetypeofmomentumIliketosee.Zanger:PercentagechangefromthesamequartersametimelastyearishowI do it, and most momentum traders do it as well. Each quarterly earningspercentagechangeshouldbegreaterthaneachpriorquarterandlargerthanthesamequarter a year ago.Of course, gains of 30–40%ormore arewhatmanymomentum traders are looking for. The larger the gains, themore likely you

haveabigfishontheline.Ritchie II: I don’t measure it in a mechanical sense, but I like to seeexplosivegrowth,becausethattellsyouthatsomethingisreallyhappeningwiththecompanythatcouldsustainabigstockmove.

S5-8:Doyourequirestrongoracceleratingsalesgrowth?Minervini: Itwould be great to have both accelerating earnings and sales.ButasIsaidbefore,lifeisn’tperfect,soyoudon’talwaysgetthatcombination.However, Iwouldwarn that if a stock is showingdecent earnings growthbutnegative sales, itwill have a limited life span.Tokeepearningsgoing strong,youwillatsomepointneedsalestokickin.Atermyoumayhaveheardcalled“productivity enhancements” can only help a company’s earnings for so long.Eventuallyyouneedtop-linegrowth.Ryan:Inalmostallcases,thesalesandearningsareacceleratingatthesametime.Acompanycan’tkeepupearningsgrowthfortoolongifitsrevenueisn’talso growing. To Mark’s point, a company can only cut costs and raiseproductivityforsolong.Zanger:Earnings growth is far easier forme to understand comparedwithsalesgrowth.Butacombinationofstrongearningsandsalesgrowthisaprovenformulaforhigherstockprices.It’shardtofullycomputethevaluationofstocksthathavegrowingrevenuesonly,likeAmazon.com(AMZN)orSalesforce.com(CRM).Iusuallyleavethosestocksforothers.Also,Ihaveneverforgottenthatmost stocks that ran hard during the Internet bubble had good strong revenuegrowthbutlittletonoearnings,andprice-to-earnings(P/E)multiplesbackthenwere north of 1,000. Of course, we know in hindsight that most of thosecompaniesfailedandarenolongerinbusiness.RitchieII:Idon’trequireit,butIcertainlywouldliketoseeit.S5-9:Doyouutilizeprofitmarginsorreturnonequity(ROE)inyouranalysis?Minervini:Yes.Iliketoseeexpandingprofitmargins.Thiscansometimes

bethecatalystbehindacompanyshowingimprovingearningsbutwithnegativesales.ButlikeIsaid,youcanonlyimproveearningsforsolongwithoutsales.Returnonequity issomething thatyoushoulduse tocompareyourstockwithother stocks in the same industry group.Generally speaking, the better stockswillhaveaROEof15–17%orhigher.Ryan:TheyarebothimportantfigurestolookatandsomethingImakenoteofasIstudyfurthertheprofitabilityofacompany.Zanger:SometimesIlookatmargins,butneverreturnonequity.Ipaylittleattention to either, as themarket knowswhat it likes, and it’s the behavior ofeachstockthatguidesmeintowinners.RitchieII: Idon’t lookat returnonequityatall. Ido lookatmarginsandliketoseethemincreasing,butthisisabitofasecondaryindicator.It’snicetosee,butatsomepointyouaregoingtohavetosellmoreofwhateveritisyou’reproducingtoreallymovetheearningsandthestockprice.

S5-10:Momentumstockstendtobehigh-growthandhigh-P/Enames.Doyoueverfindlow-P/Emomentumstocks?Minervini:IrarelyconcernmyselfwiththeP/Eratio.Asamatteroffact,IwouldratherinvestinanamewitharelativelyhighP/EthananultralowP/E.Atleastwith ahighP/E,youknow there’s somethinggoingonand there’s somedemand.WhenastocktradesatanexcessivelylowP/E,itcouldbeanindicationthat something is reallywrong.Of course,with a very high P/E, there’s littleroomforerror,soit’simportanttomoveoutofthenameifthingsstarttoturnsour.Ryan:NotoftendoyoufindamomentumstockwithalowP/E.Thesestockstend to be slower-growing companies that all of a sudden show sometremendousearningsacceleration,andthemarketisjuststartingtorecognizeit.Zanger:Not really, though there have been a few stocks overmy 25-yeartradingcareerthathavedonewell,suchasAppleInc.(AAPL),thathavemovedup400pointsor sowhile theirP/Enevergotover20.Therehavebeen times

whenthestocksinasector,suchasthesemiconductorstocksbackintheearly1990s,were trading at lowP/Es as a group, and then they started tomoveupfromP/Esof10–20toP/Esof40–60andwithsomemovingevenhigher.AswegotclosertotheInternetrage(late1990s),theywentevenhigherasdemandforcomputerstogetconnectedtotheInternetturnedintoafulltsunami.Thisliftedall boats in that industry to historic valuations with P/Es exceeding 100 andmuchhigherforsomeofthosesemiconductorstocks.Butasageneralrule,lowP/Estocks(8–20)usuallystaylowandmoveslowly.Ritchie II: I never look at P/E—so I really can’t answer that with anycertainty.

S5-11:What’smoreimportant,currentquarterlyearningsgrowthorthelong-termgrowthrate?Ordoyourequireboth,orneither,toenteratrade?Minervini:TheonlytimeIconcernmyselfwiththelong-termgrowthrateiswhenIcomparecurrentearningstogetanideaifgrowthisacceleratingversusthe historical numbers.With regard to future growth, no one knowswhat thelong-termgrowthofacompanywillbe—noteventheCEO—andpastgrowthissimplylookingintherearviewmirror.Focusoncurrentquarterlygrowth.Mostof the better stocks will show current growth rates accelerating faster thanpreviousgrowth.Ryan:Thebestsituationisifyouhavebothcurrentquarterlyearningsgrowthand a strong long-term growth rate. I would put the greater emphasis on thequarterly earnings acceleration though, because thatwould include stocks thatmightbeinaturnaroundsituation.Zanger:Most all ofmybigwinners had very large earnings growth in thecurrentquarterandinthepastthreetofourquarters.RitchieII:Idon’trequireeither,butI lookat themostrecent threetofourquartersaswellaswherethetrendisonayearlybasis.Soifthestockhasagoodfewrecentquartersandisonpacetomakemorefortheyearthan,say,thelast

fourtofiveyears,Itakethatasaverygoodsign.

SECTIONSIX

GeneralMarket

S6-1:Canyouapplyyourtradingmethodtoindexesorjuststocks?Minervini: I tradestocksbecause thisgivesmeleverageon the indexes. Ifthe Nasdaqmoves up 10%, leading stocks couldmove up 5 to 10 times thatamountduringthesametimeframe.Ryan: You can apply these methods to indexes and exchange-traded funds(ETFs),butImainlyfocusonindividualstocks.Zanger:Tradingchartpatternswithvolumeapplytoeverythingandanythingthattrades,fromstockstocommoditiestoindexestocurrencies.RitchieII:Youcancertainly apply someof the sameprinciples; however,theindexesthemselvesarefarmoreefficientlypricedandnoisythanindividualstocks, so theyaremuchmoreprone towhipsawactionandaberrantvolatilitythat can jerk you around. I have at times, when I’m very bullish and feelunderinvested,takenadecentpositionintheindex—althoughIonlydothisifIfeelwe’re at a very low-risk pointwhere I can do sowith a really tight stop.However,Iusuallyliketotradestocks,becauseifthemarketisreallygood,thenevenbeinginonereallygoodnamewillbefarbetterthantradingtheindex.

S6-2:Doyoutrytotimetheoverallmarketasaguidetoyourtrading?Doyouhavesomemarketgaugeorindicatorthatyoutrack?Minervini:Notreally.Ihaveageneralmarketriskmodelthatdoesaprettygoodjobofgettingmeinandoutnearmarketturningpoints,butmymainfocusisontheindividualstocks.Iftherearenostockstotrade,itdoesn’treallymatterwhatsomeindicatorormodelsays.Ryan:Iuseafewdifferentindicatorstotimethemarket,butyouhavetobecarefulnottoletthegeneralmarketgetyoutoobearishorbullishastoinfluence

whatishappeningwithyourindividualstocks.Youcouldgetasellsignalfrommarket indicators, but if your stocks are holding up well, you shouldn’t sellthem. You probably heard that saying, “Don’t throw the baby out with thebathwater.”Youwanttowatchthegeneralmarketbutnottothepointthatyousellallyourstockswhenyourindicatorsflashadowntrend.Zanger:There’s nomagic indicator out there other than the charts and theleading stocks, along with how they are behaving. Chart patterns and pricebehaviorareeverythingtome.RitchieII:TherearesomegeneralmarketindicatorsIwatch,liketheoveralladvance-declineline,newhighsandlows,overallvolumeonthegeneralmarket,sentiment, etc. However, I don’t use any of them as a timingmechanism butmoreassecondaryindicators.Iusuallyneverbuythegeneralmarketonthelongside;at timesIwillshort itbutnotbecauseofanyoneindicator.Togethermytrading and theuniverse of stocks I’mwatching create theprimary indicator Ilookat.Sometimesthatindicatorishighlycorrelatedtohowthegeneralmarketismoving,andsometimesit’squitedifferent.

S6-3:Howdoyouselectwhichstockstosellwhenyouhaveanewmarketsellsignal?Minervini: I just let the stocks signpost which ones I should sell. ThishappenseitherifIgetstoppedoutorifIhaveadecentgaininaname;inwhichcaseI’llchokeoffthetradesoIgetstoppedatapointthatIlockinamajorityoftheprofitwhenapullbackoccurs.AfterI initiatea trade,Iwait foroneor theothertotakeplace.Stocktradingisaboutanticipatingcomingmovementsandthenwaitingtobe

provedrightorwrong.Even if I turnbearishon themarketwhile I’mholdinglongs,Iwillusuallyletthestocksstopmeout.Idon’tusuallyselleverythingonmy“opinion”of themarket. Isimply tightenmystopsand let thepriceactiontakemeoutofthepositionsonebyone.Veryoftenahandfulofmystockswillholdtheirstops,andI’llevengetthroughamarketpullbackstillholdingnamesI

hadbeforethecorrectionbegan.Ryan: The stocks that I have a loss on are the first to go. If they haven’tperformedwellsinceIboughtthem,theyareprobablynotgoingtoactwellinapoormarketenvironment.Ifthewholemarketisstartingtorollover,Iwillworkuptheorderfromweakesttostrongest,sellingthemofforreducingpositions.Iwanttoholdontomybeststocksaslongaspossiblebecausetheymightresistmost of the market decline and then continue higher when the next uptrendbegins.Zanger:WhenIhaveanewmarketsellsignal,Iselleverythingatonce,eventhekitchensinkifIcanpryitloosefromthewall.Whywaitforastocktomovelowertosellit?Sellitnowbeforeitplungeswiththemarket.RitchieII:Idon’ttradeonmarketbuyorsellsignals;ifastockhitsmystoplevel,thenIsellit.

S6-4:Whenthemarketturnssour,areyouinclinedtotakeprofitsonmarginalwinners,setbreakevenstops,orwaitandletyouroriginalstoplossgethit?Minervini:IfIfeelthemarketisinrealtrouble,Iusuallystartmovingstopsto breakeven levels on marginal winners, and I choke off big winners withbackstops. I try to allowmy stocks to go through the first “natural reaction”(pullback). I may just sell the stocks that get into trouble or those that havegottenwellaheadofthemselves.Withallthatsaid,it’sstillajudgmentcallandabalancingact,andthat’swhytradingisanart.Ryan:IfIfeelthemarkethasenteredadowntrend,Iwilltakeprofitsonmymarginal winners to cut my invested position. The first stocks to go in myportfolioasthemarketturnsdownaretheoneswithlosses, thentheoneswithmarginalgains,andlastlythebestandstrongeststocksinmyportfolio.Zanger:When themarket turns a bit sour versus taking a hard break, I’mmoreinclinedtoreduce60–80%andthenseewhatthemarketwantstodo.Ifitregainsitsfooting,Iwilladdbackstrongstocksatveryselectiveareas.

RitchieII:ThisisreallydifferentdependinguponwhereIthinktheoverallmarketisandhowmytradinghasbeengoing.IfI’mcomingontheheelsofadifficult period, I’m more apt to just tighten everything up or cut and runaltogether.

S6-5:Ifanuptrendingchartlooksgreatbutwe’reinadowntrendingmarket,doyoubuythestockorremainonthesidelines?Minervini:IfIhaveevidencethatweareinacorrectionor,worse,inabearmarket, Iwillgenerally stayon the sidelinesor, at thevery least, trade lighterthannormal.IfIseesignsofaccumulationinthemajoraveragesandstocksaresettingupconstructivelyaccordingtomycriteria,Iwilltakesomesmall“pilotbuys.”However, Idon’tusually stepupmy tradingmuchuntil I seea secondwaveof stocks setup subsequent to the firstwave—andprovided that themypilotbuys showsomeprogress and the secondwave starts to emerge. Inmostcases, Iwant toseeadditional follow-through in theaveragesaround thesametime.Mostimportantly,Iwanttogainsometractionandseeprogresswithmyinitial commitments.Once I see that thingsareworking, I stepon thegasandrampupmyexposureprettyquickly.Ryan: If the stock has all the characteristics that I look for even in adowntrendingmarket,Iwillgoaheadandbuythestock.Therearetimesevenintheworstofbearmarketswhereacompanyisinastronggrowthphaseanditsstockcanbuck the trend inadownmarket.But therearevery fewstocks thatcandothat,soyouhavetobeveryselective.U.S. Surgical is one example that continued to make new highs when the

marketrolledoverinJuly1990anddroppedover20%intoOctober1990duringthe Iraqi invasion ofKuwait.U.S. Surgicalmade a series of higher bases andmovedfrom$24to$34duringthatsametimeperiod.Thestockthenexplodedtotheupsidewhentheweightofthemarketcameoff,andthestockmovedfromthemid-$30stoover$130.Zanger:Theoverallmarkettrendisthecompassshowingmetruenorth,soI

avoidstocks90%of the timewhen themarket is inadowntrend.However, ifit’sjustamarketswoonof2–3%,thenIwouldstepintoaleadingstockthatisbreakingoutwhilethemarketisinthismodestdipdown.Therearerarecircumstanceswhenyoucangoagainsttheoveralltrend;thisis

thecasewithgold,whichoftenmovesupwhenthemarketistrendingdown,orwith a bear ETF stock that is moving up when themarket is trending down.Growthandmomentumstocksareusuallymovingwiththeoverallmarket.RitchieII:Adecliningmarket isnot reasonenoughby itself forme tonottake a trade. In general though, if there is only one stock that is holding upduring adecline, I’musuallynot inclined tobuy it; Iwant to see avarietyofstocksthatlookattractivepotentiallybuckingthegeneralmarkettrendinorderformetobereallyinterested.

S6-6:Howdoyoudetermineifthemarketisunderdistributionoraccumulation,andhowdoyouusethiswithrespecttoyourtrading?Minervini:Ifthemarketissellingoffandvolumeisexpanding,thatwouldindicatedistributionandtheoppositeforaccumulation.Ilooktoseeifmystocksareconfirmingthisaction.Ryan: I watch the relationship between the price and volume action in themajor indexes.That influences thepercentage that I shouldbe invested. If themarketisstartingtohavesomebigdowndaysonincreasedvolume,thatmightcausemetocutbackonthesizeandnumberofthepositionsImighthaveintheportfolio.Zanger:IuseanaudioprogramthatIwroteformyselfbackin2000,anditgivesmea“soundpicture”ofhowthetradesareclusteringandtheirfrequency.TheprogramiscalledIQXP.com,andthissoundsystemisjustasmallportioninthisprogramthatIhadwrittenandinstalledbytheownerofIQXP.Iput inabout12stocksand then listen to themarketallday. If thebidsare

beinghit, then itmakesacoconut sound;or if theask isbeinghit, itmakesahammersound.IfIhearapreponderanceofcoconutsgoingoffforafewdaysor

weeks,thenIknowdistributionistakingplace;andiftherearehammersgoingfordaysonend,thenIknowbuyersareallaround.RitchieII:IjustlookattheNYSEandNasdaqCompositeindexesandseeiftheir most recent advances or declines have been on higher-than-averagevolume. The most important factor for me is to not see heavy selling if I’mstartingtogolong,becauseitpotentiallymeansthewindisnotatmyback.

S6-7:Whatoverallmarketanalysisgetsyoutoinvestmoreaggressivelyinthemarket?Howdoyouknowwhentosteponthegas?Minervini:Mystockpurchasesshowgains.That’sreallymymaingauge.Ifstockssetup,Itakesomepositions.Ifthingsareworking,Igetmoreaggressive.Whenmy stock trades are notworkingwell, I cut backmy exposure and thenumberofcommitments.Thisisaverysimplemethodbutveryeffective.Ifyouscaleupwhen tradesareworkingandscalebackwhen thingsarenotworkingwell,youensurethatyouwillbetradingyourlargestwhentradingyourbestandtradingyoursmallestwhentradingyourworst.Thisishowyoumakebigmoneyandavoidbiglosses.Ryan: If I see a number of stocks breaking into new high ground and newleadership,thenthatwillprobablyleadmetoseethisasawholenewupleginthemarket.Thatwouldgivemetheconfidencetoinvestmore.Zanger:Recognizingverypositivechartpatterns is thekey togettingmoreaggressive,asisanalyzingearningsandwhattheFedisdoing.Whenyouhavethiscompletepackageofskills,thenyouwillknowwhenit’stimetosteponthegas.Stocksareusuallystrongest in thefirstfewyearsofFedeasingandwhenearningsgrowthstartstoappearafterarecession.RitchieII:Theonlythingthatgetsmetoreallystepupmyexposureismyactualtrading.Itdoesn’tmatterhowmanyindicatorsorevenhowmanystockslook good; if I’m not making money, I’m not going to get more aggressivewithoutsometractionfirst.

S6-8:Ifyouseealeadingstockbreakoutfromasoundchartpattern

beforethemarketexperiencesanIBDfollow-throughday(FTD),doyoubuyit?Ifyes,doyoubuyafullpositionbeforeafollow-throughdayhappens,orareyoumoreconservative?Minervini:The timewhena follow-throughday isessential isafterabearmarketoragood-sizecorrection.Thisiswhenyouwanttoseebigvolumecomeinasthemarketcomesoffthebottomandstartsanewupleg.However,Irelymoreon the individual stocks thanany index, indicator,ornews item.Even ifthemajorindexesbottom,thatdoesn’tmeanindividualstocksarereadytomoveupinearnest.Andthentherearetimeswhenleadingstocksstarttomovewellinadvanceofthefinalmarketlow.So,yes,IwillbuystocksevenbeforeanFTDoccurs.Ilookatitthisway:ifthemarketlooksgreat,buttherearenostockssetting

up thatmeetmycriteria, I’mnotbuyinganythinganyway.So thestockshavethe final word. I thinkmost traders would domuch better if they completelyignored the “market” or the major indexes and just focused on the stocksthemselves.Ihavealwaysbeenprettygoodatcallingmarketturns,eventhough,ironically, Idon’t try tocallmarket turns.Youwouldbeamazedathowgreatyour market calls can be when you tune out the “market” and tune into thestocks.Ryan:Imightstartwitha5%positioninsteadofa10%positionifthemarketisn’tinanuptrend.Iwouldquicklyaddtothepositionifitcontinuestofollowthrough. You have to realize that the leading stocks inmany cases break outsometimesmonthsbeforethemarketstartsintoanuptrend.Zanger: Buying before a follow-through daywould depend on the stock’sprior strength and other factors, such as when earnings come out, what theearnings are, how liquid the stockhappens to be, andhowother stocks in themarketarebehaving.Iwouldsayyes,IwouldbuyaleaderwellbeforeanFTD,providedithashighvolumeandamazingearnings.However,Imostlikelywouldnotbuyafullpositionandmightget50%long

and thenwait formore conviction in other leading stocks or a follow-through

daybefore loadingup.Let’snot forget thatmany follow-throughdays fail, soit’snotthecure-allit’scrackeduptobe.RitchieII:IfIamcomingoutofcashoraverydefensiveposition,Ialwaysemploya“toe-in-the-water”mentality first. Iwillbuybeforeageneralmarketconfirmation, but usuallywith smaller-than-normal exposure; but as soon as apositionortwobeginstowork,Ilooktostepupmyexposureandrisktoleranceratherquickly.

SECTIONSEVEN

EntryCriteria

S7-1:Whataspectsofastockwouldreallygrabyourattentionasapotentialbuy?Minervini:Fromafundamentalstandpoint,earningsbreakingoutofarangeandaccelerating.I lookforquarterlyaccelerationanda“breakoutyear.”Ialsowant to see sales increasing.As far as the technicals are concerned, Iwant toown stocks that are holding up relatively well coming out of sound basesthroughlow-riskentrypoints.Ryan:Iliketoseethatthestockhashadtheabilitytohaveastrongmoveinthe past.Many times I amnot buying a stock on its firstmove up, but on itssecondorthirdmove.Iwouldalsoliketoseeaverytightbasewithasmallpricerangeanddry-upinvolume.Combinethatwithgreatfundamentalsandpartofastronggroup,andthatwouldgetmyattention.Zanger:Agreat-movingstock inastronggroupwithsuperiorearningsandrevenuegrowthwillgrabmyattentioneverytime.Showmethisstockcombinedwith a fabulous chart pattern, and Iwill back up the truckwhen it leaves thebasingarea.RitchieII:Iwanttoseeastockthatlookstobeunderaccumulationthathasgoodearningsandsalesonthetable.Sotechnicallyitshouldbeinalong-termuptrend that is supported by volume and then consolidating in an orderlymanner.

S7-2:Doyoubuythefullpositionallatonce,ordoyoubuypartiallyandaddinincrements;anddoyouscaleoutwhenastockmovesagainstyou,ordoyoujustsellitallatonce?Minervini:SometimesIwillbuyatinyamountjusttokeepmyfingeronthe

pulseofthemarketwithrealmoneyatriskandthenscaleinfromthereifthingsprogress.Butoncemytradesstartworking,Igorightinwithfull-sizepositions.Whenmytradingisworkingwell,Iliketorunrackslikeapoolplayeronaroll.Butmostofthetime,I’mmovinginincrementallyandfeelingthingsout.IfI’mgoingtoscalein,Isometimeswillwaituntilneartheendofthedaytoseeifthestockisgoingtoclosestrongbeforeadding.Ryan:Ialwaysscaleinandoutofaposition.OnthedayIbuyastock,Imightfirstbuya5%position,andaswegetintothelasthouroftrading,Iincreaseitto10%. If it doesn’t have a strong close, Iwouldwait for thenext day to see ifthere isanyfollow-through. If there is, Iwillquicklymove it to10%.WhenIsell, I usually scale out of a positionunless it is breaking all sorts of support;thenIsellitallatonce.Zanger: If thestockhashadsuperearningsand isgappingupquicklyafterhours,ImighttrytobuysharesifIcangetwithin5%ofthebase.Thenextdayandaftertheearningsconferencecall,Imightaddanddoublethesharesandseehowthestockisholdingup.Thehopeisthatthestockcansitforaweekorsoandcreateabullflagorchannel,andthenImightadd.Scaling in is typical for people trading size, because it’s all about liquidity.

Whenastockisbreakingoutandvolumeisheavy,Ibuymaybe40%ofwhatIwouldliketohave.Shouldvolumeandpricebehaviorcontinuetobefavorable,Imightaddanother20%orsolaterintheday.Iusuallywaituntilthenextdayortwobeforeaddingthebalance,butif thestockreststhedayafterIboughtit,Imight hold off on adding the balance until the stock can reaccelerate from asmallbaseandconfirmwithnewhighs.Should the stockstallout instead, Iwill reduce in reversemannerofwhat I

notedabove.InsomeinstancesIwilldumpeverythingratherthanscaleout,if,forexample,thestockiscrackingdownhardorbecomingsloppy.RitchieII:Iusuallytryandscalein,butmuchofthisdependsuponhowmytradinghasbeengoingaswellasthetechnicalsetup.IfIfeelImaybebuyinga

nameearly,thenIwillalwaysbuyasmallerlineandlooktoadd.Iwillonlybuya “full” position right away if trading is goingwell and I particularly like thesituation.Forselling,Iwillgenerallyscaledownifit’salargerposition,butifthestopistightandIknowIwantout,Ihavenoproblemcuttingitallatonce.

S7-3:Areyoubuyingthebreakoutacertainamountabovethebreakoutpriceintraday,ordoyouwaitfortheclosingdailyprice?Minervini:Ibuyintraday.Oncethepivotpointisbreached,I’min—usuallyafewpenniestoasmuchas20–30centsabovemybuypoint.Ryan:WhenIsetaspotwherethestockisbreakingout,Ibuy1centabovethatprice.Imightstartwithasmallpositionasitisbreakingoutintraday,waitforacloseintheupperhalfofthatday’stradingrange,andthenbuytherestoftheposition. If it is aperfectbaseand thevolume is strong, then Iwillbuy itintraday.Ifit lookslikeitwillclosenearitshighonabigpickupinvolume,Iwilladdtogeta5–10%positionthefirstday.Zanger:ThestockcouldbelonggoneifIwaitforaclosingprice.Iusethefirst 10–20 cents above the breakout or pivot area to startmy buying and seehow thestock reactsand thenadd relentlessly if thestockhasvolumeand theoverallmarketisjuststartingtomove.Let’snotforgetthatstocksonlate-stagebasesneartheendofamarketmove

failfartoooftentotradelargesize,soifyouhavetobuyoneoftheselate-stagebases,buysmallpositionssoasnottogetpummelediftheyfail.Puttingtogetherapackageofmarketstagesandstockstagesworksbest.SometimesIhavetositout themarket for two to sixmonthswithno trades,waiting for thebig tradeopportunitiestocomealong.Thebiggestmistaketradersmakeisthinkingtheyhavetomakeafewtrades

everyday.Whilethismightworkforafewskilledtraderswithafewthousandshareshereandthere,it’snotwherethebigmoneyismade,atleastnotforme.To trade large sizes you need a stock that has built a super base and thenexplodesonmillionsofshares tradedperday. It shouldcontinue to tradewith

the same level of impressive volume day in and day out for amonth to threemonths.RitchieII:Ialmostneverwaitforaclosetobuy,althoughIgenerallyliketosee the stock close above the breakout level if there is a clear technical pricepoint. Iwilloftensetanalarmata level that I think is importantand thenseehow the stockactsbefore Iputonaposition. If I’mbuying, Idon’tgenerallywanttoseeatonofsharesforsale,becauseifthere’slotsofstockforsale,thetradeprobablyisn’treadytomovewithanyrealconviction.

S7-4:Howdoyougofromcashtofullyinvested?Minervini: I let the stocks guideme. If stocks are setting up andmovingthroughbuypoints,IbuythemonebyoneuntilI’mfullyinvested.Itrynottowaitformy“favorites.”Oftenwhileyouwaitforaparticularstocktoemerge,youmiss theboaton realmarket leaders thatareblastingoff.Youwant tobeneutralandagnostic.Trustthechartsandyourresearch,andbuythestocksthatmeetyourcriteria.Youropinionwillalwayscostyoumoneyinthelongrun.Ryan: It all depends on howmany stocks I can find to buy and themarketitself.IfIfeelthemarkethasturned,butIcan’tfind10stockstobuy,Imightget exposure bybuying a position in theSPYsorQQQs.Then I’ll peel thoseETFsoffasIfindstocksthatarebreakingout.Zanger:Followingthemostliquidhigh-betastocksmakesiteasytogetfullyinvestedquickly.Ifthemarketiscomingoutofacorrection,youhaveplentyoftimetoscalein.IfIget80%investedintwoorthreedays,thatisaseriousmoveforme. Iwouldonlyconsidergoingall inonmargin thesedaysonextremelypowerfulmarketmoves,whichhappenrarely.RitchieII:Thistomeiswheretheskillhastobelearnedandhoned,andit’sthenumberoneareaI’mstill trying to improveupon. Inmyexperience,whenyou are coming out of a cash position, you have the most potential risk andopportunity at the same time.The onlyway to tell the difference is to let themarketactiontellyou.

IfIbuytwonamesandbothofthemimmediatelystartfollowingthrough,thenIgetmoreaggressiveand stepupmysizeandexposure.Likewise, if the firstthingsIbuydon’tfollowthroughorevenstopmeout,thenI’mgoingtodotheopposite.Ifyouletthemarkettakeyourexposureupanddown,you’llalwaysdobetter than ifyouarbitrarilydecide;andinmyexperience themoreaggressiveyougetontheheelsofinitialsuccess,thebetteroffyou’llbe.

S7-5:Howdoyoumanagetotrademanystocks?Whatif,say,4or5outof15youarewatchingbreakoutatthesametime?Minervini: Inmore than30years of trading, I havenever had five stocksbreakoutatexactlythesametime.Sometimesafewwillbreakoutveryclosetoeach other. Of course, you can always use limit buy-stop orders preset atbreakoutlevels.Ryan: I have alerts set on all the stocks that I am interested in buying oraddingto.Iftheyallbreakoutatthesametime,Ibuytheminorderofstrongestpotentialbasedonearningsandpastpriceperformance.Zanger:Itradeeverythingwithverbalmarketorderstomybrokerthesedays,andIdon’tuselimitorders.I’veusedmultiplebrokersandmultipleplatformsinthe past tomove quicklywhen needed.We have used algorithms (algos) likeSonar through theGSplatformandRediPlusandBaytrade’splatformwith theBTIGbrokerage.Intheend,Iprefertotrademanuallybecauseithelpsmegetabetterfeelforthestocks’pricebehavior.MybrokerandIhaveoursystemdown,andwecanmovefastenoughtogetmetowhereIneedtobemostofthetime.RitchieII:IsetanalarmtoalertmetoanythingthatIthinklooksbuyable,becauseIwanttoseehowmanystocksinmyuniverseareactingwellastheyhitwhatIthinkareimportantpricepoints.Inaddition,therearenamesthatIoftengointothedayknowingIwanttobuyandothersthatImaybuydependinguponwhatmyoverallexposureisandhowmytradingisgoing.Ifit’sanamethatIhavedecidedisamust-buy,thenIbuyitregardless;andif

more names are breaking out than I can afford to buy based upon my risk

tolerance or cash available, then I generally buy those that are ranked highestbasedonmycriteria.Finally,Iwillsometimesconsiderjockeyingforpositionbysellingpartorall

ofanamethatisn’tworkinginfavorofonethatIlikemorethatisbreakingout.However,Itryandletthestocksdeterminewhattobuy.Inmyexperience,ifIjustbuywhat’sworking,Iusuallydon’twinduptoofaroff.

S7-6:Howdoyoudefineyourentrypoint?Minervini: I’m looking forwhatLivermore referred to as the lineof leastresistancetodevelop;that’satradingrangethatmaturestoapointwhensupplystops coming tomarket.When you have a limited amount of supply and bigdemandfortheshares,yougetexplosivepriceaction.Ryan:Ihaveacoupleofentrypoints.Oneiswhenthestockisnearitshighs,andanotheriswhenthestockhaspulledback.Whenastockisbreakingout,Ibuy it when it is breaking above most of its recent trading range. It doesn’tnecessarilyhavetobetheexactnewhigh,butitneedstobeabove90–95%ofthetradingrangeformednearthenewhigh.Theotherbuypointiswhenastockhaspulledbackandisturningupbutisnomorethanabout15%offitshigh.Atthat buy spot, I use a fewmore technical indicators such asmoving averages,trendlines,andmomentumreadings.Zanger: An all-time new high is usuallymy best entry area on amassivesurge in volume. If themarket happens to be coming off oversold areas or amarketcorrection,youhavetotargetkeyreversalbarsordescendingchannelsorwedgesforthoseentries.Ritchie II: If you were to examine most of my trades, you would see amajorityofthembeingexecutedinthedirectionofthetrend,within5%ofnew52-weekhighs, and at timeswhere the stockhas been correcting in a shorter-termtimeframe.

S7-7:Doyouevertradeastockthatyoutookarecentlosson?Whatisyourreentryplan?

Minervini:Yes,Ioftenreenterastockthatpreviouslystoppedmeout,butonlyifthestocksetsupanotherlow-riskentrypoint.Idon’tjusttakeastockoffmylistbecauseitstopsmeout.Thisiswhyyoushouldhavevarioussetupsandtechniquesforentry.It’slikehavingatoolbox:youdon’tbuildahousewithjusta hammer; you have all sorts of tools to get the job done. I break down resetpatternsintotwogroups:(1)pivot-failureresetsand(2)base-failureresets.Pivotfailures can recover very quickly, sometimes in just a fewdays.Base failurestakelonger,usuallyweekstomonthsdependingonhowseverethebreakis.Ryan:Ihavebeenstoppedoutacoupleoftimesinanameonlytocomebackthethirdtimeandhaveahugewinner.Myreentryiswhenthestockagainsetsuptechnically.Imighthaveboughtthestockasitwasfirstbreakingout,butitfailedandcamebackintothebase.Ifthestockthenspendsmoretimerebuildingandcleaningupthebase,Iwilltryitagainasitgoestohighsforthesecondorthirdattemptoutofthebase.Zanger:Idoandhavemanytimes.GenerallyIliketoseethestockresetitsbase,whichcouldbeafewweekstoamonthormore.Iwouldnot,forexample,reenterthestockwithinafewdaysofexiting,asit’sclearlyhavingtroubleatthebreakoutareaatthattime.RitchieII:Absolutely. Ingeneral, I thinkamajordifferencebetweenprosand novice traders is theway they think about a particularmarket that hasn’ttreated themwell.Forexample,proshavenoproblemstepping intoastockormarketthatthey’velostonafewtimesinarow,whereasnovicestryonce,andiftheyaren’tsuccessful,theygiveup.Theymaythinkthataparticularmarketorstockhasit“in”forthem.Inmystyle,Icansometimesberightbutbetooearlyortootightonmystop,andsoaslongasthenamedoesn’tbreakdownhard,Iwillkeepitontheradarforreentry.

S7-8:Howdoyoudealwithbeingshakenoutofatradeonlytoseeitgoontohityouroriginalentrypriceagainlaterintheday?Minervini:Iwillsometimesgobackintoanamethatstopsmeoutintraday.

It really depends on how it’s trading.This is based on intraday action, so it’smoreonafeelforthe“tape.”Ryan:IwouldlooktoseeifIhadplacedmystoptooclosetomyentry.Ifithappens inoneday, then the stockmaybeveryvolatileandnota stock I canstomach.Sometimesvolatilestocksrequiretoomuch“eyeballtime”andarebestlefttootherinvestors.Ifthestocksetsupagain,Icanalwaysbuyitback.Zanger:Thatdoesn’thappenoftenthesedays,thoughtherehavebeenafewcasesovertheyears.MostofthosecaseswerebackintheInternetbubbledayswhenI tradeda fewernumberofsharesandIwouldselloutwithavery tightstopandreenterwhenthestockmadeanewdailyhigh.Ofcourse,youhavetowatchthesesortsoftradesveryclosely,ortheycaneat

youup.Inthosedays,ifyouwereright,thestockmightsoar$12–$25onagapupthenextdayandthensubsequentlyadd$50ormorethefollowingfewdays.RitchieII:IrarelyeverreenteratradeIhavegottenknockedoutofthesameday;usuallyIreassessandwaitadayortwo.SometimesIwillreduceandaddback a piece of a name, but if I’ve completely liquidated something, I willalmostalwayswaituntilthenextday.

S7-9:Doyouthinkatradershouldentermomentumstocksusingpullbackstomovingaverages(MA)?Minervini:Iwillsometimesbuyonapullbacktoamovingaveragesuchasthe 20-day or the 50-day. I generally will only buy on pullbacks to movingaverages the first or second time after a breakout from a sound consolidationperiod.However,evenifIdobuyonapullback,Ionlybuyasthestockturnsupandneverasthestockisfalling.Iwanttoseethestockmovinginthedirectionofmytrade.Keepinmind,iftradingwereaseasyasjustbuyingapullbacktoamovingaverage,everyonewouldberichstock traders. It’saveryobviousandbasicwaytotrade,andattimesitcanbeprofitable,especiallyinleadingstocksatthebeginningofabullmove.Ryan:Yes,youcanbuypullbacks,but itdoesn’tnecessarilyhavetobetoa

movingaverage.IhavefoundsomeindicatorssuchasMACDandstochasticstotellmewhenastockisreadytoturnupfromapullback.Iwatchthepriceandvolumecharacteristicsasthestockpullsbacktogivemeanotherindicationthepullback is over. Buying pullbacks is a bit more complicated than buyingbreakouts.Zanger:Itwouldbeanidealsituationtogetastrongstocktopullbacktothe10-day or 21-day simplemoving average line. I find the stockswith the bestmomentumfindsupportat thesemovingaverage linesandbounce from there.The50-dayand150-dayMAcanbegoodtoo,butformethe10-dayand21-dayMAlinesarebestwhenconsideringastockonapullback.RitchieII:Sure,aslongastheyhaveaplanorideaforwhattheyexpectthestocktodoattheaverage.Forexample,Iwon’tblindlyputinalimitbidforastockatornearitsmovingaverage,butImaylooktoseehowitactsinreferencetoanaverageandthenbuyitafterithasbouncedoffit.Ifyoublindlybuy,youareguaranteed tobe inevery losing situationwhere

theaverageisnotsupportive.Ifyouwaitforabounce,youavoidthe“falling-knife” situations; youmay have to pay up a bit, but that price is oftenmorefavorableintermsofprobabilityoftradesuccessthanthelowerprice.

S7-10:Couldyougiveadviceonaddingtoyourwinners?Minervini: I’mnot as big on adding to yourwinners asmuch as I amontiming thepurchase just rightwithanoptimalpositionsize in thefirstplace. IwilladdifIstartedwithasmaller-than-normalpositionandthenanewlow-riskentrypresentsitselfsubsequenttomyinitialentry.Iwilloftenstartmypositionearlyinthedayandthenrampupmyexposuretoafull-sizepositionifthestockclosesstrongduringthelast15to30minutesoftheday.Ryan: It is all determinedby theprice action aftermy initial purchase. If itfollowsthroughongoodvolume,Iwillprobablybeaddingtomyposition.Ifitstallsandhaspoorclosesonweakvolume,thenthereisnoreasontoincreasetheposition.IonlyaddtostocksonwhichIalreadyhaveaprofit.

In a year, you really only need one or two really good stocks to have greatperformance,butyoumusthandle themright.Youmustadd toastockafter ithas built a new base following its firstmove up.You can add to it again onsubsequentbases.Onalongermove,youcanbuildthesizeofthepositioninto20–25% of your portfolio. A position of that size should only be achievedthroughpriceappreciationandbyaddingmoreonsubsequentbases.Zanger:Adding to awinner is basically averaging up. If the stock takes aquickbreakonadowngradeorasecondarystockoffering,Icouldbeunderwaterinaflash.Justbuyrightatthepivotpointorahairaboveit ifvolumeandthemarketaregood,andhangonfortheride.Sellonthewayupintostrengthandvolume. The Street must be very hungry for the stock and pushing the stockpriceuprapidlywithmassivevolume.ThiswouldbeastockIwouldbebuyingheavilyonthebreakoutandthenaddingmoreafterafewdaysofrest.RitchieII: I thinkuntilyou’vedoneitsuccessfullyanumberoftimes,youdon’t really see its importance.Most people tend to be backward looking bynature in terms of almost all experiences. So when you own something at alowerprice,theideaofbuyingmoreatahigherpricefeelswrong,becauseyouthink“IshouldhavejustboughtmoreatthelowerpricewhenIhadthechance.”Intermsofmyowntrade, ifIonlyaddedwhenpriceswerebacktoevenor

belowmyentries,Iwouldhaveeliminatedalmostallmybesttrades—andaddedtomanyofmyworst.Youhavetoreallywrapyourmindaroundthisideaandthenseeitinactionanumberoftimesbeforeitreallystartstosinkin;theideaisto pyramid in such awaywhere you don’t addmuchmore risk but use yourgains to financebuyingmoreand really torqueyouroverall risk-reward to theupside.

S7-11:Doyoubuygaps?Ifyes,whatifthegapopenspastyourbuypoint?Minervini:As a general rule, I don’t chase gaps. If a stock gaps upmorethanafewpercentagepointspastmybuypoint,Iwon’ttouchit.Thetypeofgap

tradeIdolikeiswhenastockgapsoutofalargebaseonanearningsreportandI get in not too far above the pivot point. If the earnings are really good, thestockshouldmoveevenhigherandputmeataprofitrightaway.ThisoccurredonJuly26,2012,andalsoonFebruary16,2012,whenCabela’s(CAB)reportedearnings(seeChart7.1).

Chart7.1Cabela’s(CAB),2012

Ontheotherhand,ifthestockgapsunderthepriorday’slow,that’sgoinginthewrongdirectionandwouldthenhavetoput inan“outsideday”orwhat iscalleda“bullishengulfingpattern”tobreakoutonthesameday.Ifastockgapsunexpectedly, I’m careful not to jump inwith a knee-jerk reaction. I come inwithaplan,andIwanttoseethingshappenasIenvision.Idon’tlikesurprises,andIrarelyreacttothem.

Ryan: I rarely buy gaps past my buy point, and only if the stock hasspectacularfundamentalcharacteristics.Isometimeswaittowardtheendofthedaytoseewhereintheday’srangethestockclosed.If ithadastrongclose,Imightbuyitandsetastopatthelowoftheday.Ifitdoesn’t,Imightwaittoseeifitcangothroughthehighofthegapday.Itusuallywillmovethroughthegapdayhighinthenextfewdays;ifnot,Ikeepwatchingitandwaitforittosetupaproperbase.Zanger: Yes, I do buy gaps unless the gap is too far past my buy point.UsuallyIwouldnotbuythestockifit’supmorethan5%abovemybuypoint.Inthesehigh-gapsituations,Iwillwaituntilasmallminibasesetsupandthenbuyasitmovesabovethatpivotareaonvolume.Ishouldadd, therehavebeena fewstocks,avery fewstocks,where Ihave

broken my own rules—for example, during a massive beat of earnings for alargeglobal-scalecompanysuchasaFacebook(FB)oraGoogleInc.(GOOG)shortlyaftergoingpublic.Iwouldnot“backupthetruck”ontheinitialgapupbutinsteadbuyabout20%ofwhatInormallywouldandseewhatkindofactionwegetthenextday.Ifthingslooksolid,Iwillpickupmostofmysharesonthesecond,third,orevenfourthday,shouldthestockholditsgapwell.OnApril22,2014, IboughtNetflix rightafterearningswere reportedwhen

thestockgappedupontheopen.Thatdaythestockclosedatthemidpointofitsdailyrange.Theverynextdaythepricereversedandclosedrightonthelow;Isoldsomethatday.Whenthestockcontinuedlowerthenextday,Iclosedoutthepositionandtookabouta6%lossonthetrade.Lookingback,itwasapoorsetupthatIforcedtooearly.RitchieII: I rarelybuygaps, although there are two scenarioswhen Iwillbuyagap.Thefirstiswhenthepricegapspastmyintendedbreakoutareabutnottoofarthatwouldmakemystoptoowide,sousuallyonlyafewpercentagepoints.TheotherscenarioiswhereIwillbuyagapwithaverytightstoponanearnings announcement that I believe is absolutely phenomenal and where I

believethereisachanceforaveryrapidpriceappreciation.

SECTIONEIGHT

RiskManagement

S8-1:Howdoyoudeterminetheplacementofstopsonyourtrades?Minervini: If a technical level coincideswithacceptable risk, then I try toholdthestockuntilthechartsours.Butinvolatilenameswherethere’stoomuchrisk, I simply use a percentage stop. I sometimes just back into a fixed dollaramountofriskandpositionsizeaccordingly.Ryan:Itisusuallyapercentagelossorjustbelowanareawherethestockhadrecentlyhadsupport.It’sbestwhenthere’sanicebasejustbelowmybuyspotbecausethatprovidesmeaverydefinitepricetogetout.Zanger: On my charts I extend rising trendlines along the bottoms of thedaily bars as a first step for determining reasonable stops. Then I look forrelatively fast-moving averages like the 10-day or 21-day.When one of theseareasisbroken,Iusuallyselloutorreduce.RitchieII:Istartfrommytradingmetrics,specificallyinregardtomywin-loss relationship. So on a percentage basis, I calculate what will help memaintain a good weighted-average win-loss relationship on my trades, whichusually dictates that I need to average in the mid-single digits in terms of apercentage stop. In addition, if I’m buying correctly and themarket is actingwell, the charts usually start to break down somewhere between 3% and 10%belowmybuypoints.

S8-2:Isthereamaximumpercentageoftotalequityyouwouldcapyourriskat?Minervini:Yes, Idon’twant toriskmore than2.5%ofmyequity.Butonaverage, I risk 0.75–1.25% of my total equity per trade. A simple way tounderstandthiswouldbeifyouboughta25%positionandsetyourstoplossat

10%,thenthatwouldberisking2.5%ofyourtotalequityonthetrade;a5%stopwouldrisk1.25%ofyourtotalequity.Ryan:Itwouldbeamaximumof1%,whichwouldequatetoa10%lossona10%position. I justneverwantanyoneposition tocauseabigsetback tomywholeportfolio.Zanger:Iwouldcapmytotalequityriskat20%ofmyentireportfolio.Onanindividualstock,Iwouldtrytocapmyriskat1–3%.RitchieII:Yes, but it is determined by a number of factors.The first andmostimportantishowmytradinghasbeengoing.IfI’vebeeninalosingstreakorhavingatoughertime,theamountisusuallynotmorethan100basispoints(BP)acrossthewholeportfolio;thenasIgetmyfooting,Istarttobumpitup,intermsofeitheraddingmorepositionsoraddingtoexistingones.Ifthingsareworkingwell,Igenerallywillhave200–300BPofriskthatI’m

carrying;and if Ihavenames that I’ve takenprofitsonorIknowareatbetterthanbreakevenstops,Iwillhaveupwardof500BPofopentraderisk,butagainthatisonlyontheheelsofsuccess.Idon’tnecessarilymakeashardand fasta rulewhen thingsareworkingas

when they’renot.When thingsaren’tworking, I’mnotgoing to takeonmorerisk,and that isa staple inmy trading regardlessof themarketbehavior, timeframe,orapproach.

S8-3:Eventhoughyoumaysettightstops,howdoyoudealwiththeriskofgapsandholdingovernight?Minervini: Unless you go flat every night, the risk of a gap is alwayspresent. You can’t eliminate the risk, but you can mitigate it. This is whereposition sizing comes intoplay. If you are buying stocks that havepreviouslyopened on huge down gaps over the past three to six months, you could betakingamuchhigheramountofriskbyowning—ifIcanborrowaphrasefromDavidRyan,a“serialgapper.”So thequalityofyourbuysplaysabig roleaswell.Ialwaystelltraderstoselldowntothesleepingpoint,orwhatmyassistant

referstoasthe“pillowfactor.”Simplyput,ifyoucan’tsleep,you’retradingtoolarge.Ryan:Overnightnewsorgapsarejustpartoftheriskyouhavetotakewhentrading.Ifyoucan’tsleepatnightworryingaboutaposition,thenyoushouldletsomeoneelsemanageyourmoney.Ifearningsareabouttobereported,Imightcutdownmypositionsizeinthestocktoreducetherisk.Zanger: Holding overnight has never been a problem forme; some ofmybiggestgainshavecome fromholdingovernight andover theweekend.Largegapsdownareaproblem,butyoucanusuallysensewhentroubleisbrewingandreduce during troubled times, like just before FOMCmeetings or somemajornews coming out. I do this frequently.Don’t getmewrong; I’ve been taggedhard on a fewmonster gaps down inmy trading career, but in the long run,holding overnight and over the weekend during powerful bull markets hasworkedinmyfavorbyalargemargin.Ritchie II: This isn’t really as big an issue as it might seem, with theexceptionofcertainheadlines,likeearnings.Ihavenoticedthatgapriskisverylimited if themarket ishealthyandyour selectioncriteriaaregood. It’sprettyrarethatastockunderaccumulationwillgaphardagainstyouinagoodmarket;however,youseejusttheoppositeincorrectiveperiodswithhighervolatility.Iusea sortofweatheranalogy. I’m fromChicago,andpeoplenot from the

areaarealwayssayingsomethinglike“Wow,theweathertheremustbehorribleinthewinter.”Andtherealityis that’s true,butyoudon’tgooutsideinshortsandaT-shirtduringablizzard.Individualstockactionissimilarinthatitcanbelargelyinfluencedbythesurroundingenvironment.

S8-4:Onsettingstops,wouldyourathertakeone10%lossortwo5%losses,givingyoumorechancestogetthetraderight?Minervini: I would rather take smaller losses and have more chances atgettingtheentrycorrect.A10%lossismy“uncle”point,ormaximumstop,butIrarelyeverseethatbigalossonatrade.Keepinmind,thetighteryourstop,

themoreaccurateyour timingneeds tobe,but thebigger the loss, themore itworksagainstyougeometrically.Iwouldratherworkonmytimingthanworkondiggingoutofahole.Ryan:Iwouldprobablytaketwo5%lossesbecauseifmytimingisright,thestockshouldn’tdropbelowmy5%stop.Zanger: Tough question to answer, as it’s “six of one, half dozen of theother.”Eitherwayyou’vestilllost10%.IguessIwouldbeinthe5%campifIhadtochooseone.RitchieII:Two5%losses;I’llalwaystakemoreshotsatasmallersize.S8-5:Canyoutalkaboutalosingtradewhenyouranalysiswentwrongandwhy?Minervini: I hate to buy cyclical stocks and rarely dowell in them, but IboughtAlcoa,Inc.(AA)inNovember2014.Thestockwentupforafewdaysand then came in; I sold and took a relatively small loss. The stock is downconsiderablyfromwhereIsoldit.Ryan:MylosingtradesoccurwhenI’mnotdisciplinedenoughtosticktomyrules.The emotion comes in, and I buy a stock that is too extendedorwhosebase is not exactly set up the rightway. Buying at exactly the right spot andgettinguponastockthatfirstdayareusuallywinningtrades.A recent losing tradewaswhen I bought Jack in theBox (JACK) as itwas

breakingouttonewhighsonMarch24,2015.Thestockhadasmallbaseafteragapuponearnings.Thestockwentintonewhighsandimmediatelystalledonthefirstday.Theverynextdayitdropped3.4%onvolumethatwasheavierthanthe breakout volume. The lack of follow-through and the absence of positivevolume doomed the stock. I sold for a 3% losswhen the stock failed to rallybackquickly.Mymistakewasbuyingastockwithasmallbaseandnotgettinganyvolume

as itmoved tonewhighs.Youwant toseemultipledaysof increasedvolumeandhigherpricestogetthestockupandmovingoutofitsbase.Thefour-week

basewasalsonotthebestsetupafterthelongmovethestockhad;longerbasesusuallyresultinbiggermoves.Zanger:Mostlosingtradesaretheresultofalackofbuyinginterestafterthestock breaks out.My analysis of the bases is pretty solid, and I can identifycandidates with a very impartial eye. I position within the best setups andrespondtowhatcomes;thatisallanytradercando.An example of one of my losing trades was in the biotech sector with

MedivationInc.(MDVN).Thestockwassurgingoutofawell-formedbaseinFebruary 2010, and the day after I bought the stock, the company’s drugwasshotdownbytheFDA.Thestockwastradingata75%discountattheopenthenextmorning.RitchieII:IrecentlyboughtasmallpositioninGlobusMedical(GMED)onFebruary23, 2015, as itwasbreakingout a fewdaysbefore its earnings.Thestockhadalargeshortinterestgoingintoearningsandwasclosetoanall-timehigh, somy analysis was that it might start moving ahead of the earnings asshorts would cover, and perhaps it could move largely in my favor if theannouncement was good. I held into the announcement, and the stockimmediatelygappedupalittlebutthenreversedhard,andIgotout.I also bought a position in OpkoHealth (OPK) onMarch 23, 2015, and it

lookedgreatinitially.However,itpromptlyreversedhardtwodayslater.Iknewimmediately that my timing was wrong, as it wasn’t acting right, and I gotknockedoutofthetrade.

S8-6:Doyouscaleoutwhenastockmovesagainstyouandyou’reataloss,ordoyoujustselltheentirepositionallatonce?Minervini:Ifmystopishit,Iselloutmyentirepositionimmediately.IwillsometimesstaggermystopsandcomeoutaveragingthesamepercentagelossasIwouldatonestopprice,butbystaggeringIcanhaveachanceatstayinginpartofthetrade.Asaresult,alosswillgetstoppedatsuccessivelylowerlevelsandpeeledoffalittleatatime,usuallyinthirdsorhalves.

Ryan: I usually sell it all at oncewhen it breaksmy stop.Your first loss isalwaysyourbestloss.Protectingcapitalisalwaysmyfirstgoal.Zanger:ThatdependsonhowliquidthestockisandhowmanysharesI’vepurchased. Inan idealworld, Iwould like toselleverythingat thesnapofmyfingersandhavethepositionbegonewithonetrade,butthatrarelyhappens.Ifvolume has dried up and the stock is cascading down, I can sell deep-in-the-money call options (calls) first, then start to sell my stock position since mysellingwillinevitablyforcedownthestockprice.Thecallswillbecomecheaperas I sell the stockdown, and thisoffsetsmy losses as I stagemyexit.By theway,animportantaddendum:I’mmorelikelytosellcallsinastockthatislessliquid and trades under 2 million to 3 million shares per day; and I’m notinclinedtodosoinaliquidstockthattrades7millionto50millionsharesaday,whereIcanjustsellmysharesaccordingly.RitchieII: The larger the position, themore I’m apt to scale out. If it’s asmall position and it hits a predetermined stop level, I’ll usually just cut thewholething,knowingIcanputthetradebackonifconditionschange.Ifit’salargerposition,Iwillusuallycutitinpiecesasitmovesagainstme.

S8-7:Doyouplaceopenstop-lossorderswithyourbrokerorusementalstops?Itseemslikethemarketmakersgunforstops,especiallywithgap-downopenings.Minervini:Igenerallyusementalstops.Attimes,theycan“gunforstops”ifthe stop is close to the current pricequote. If the stop is far awayon a liquidname,youshouldbefine.Ryan: I only place my stops intraday and don’t like to leave them inovernight. I don’t like the emotion associated with the first 45 minutes oftrading.Imakemostofmymistakesinthatfirstpartoftheday,soIusuallysitonmyhands,readthenews,andjustwatch.OccasionallyImightfadeatrade,meaningthatIwouldbuyifitisdownandsellwhenit’supifIthinkthatearly-morningmoveiswayoverdone.

Zanger:Iusementalstopscombinedwithindividualstockaction.Mostbullmarketsare“buythedip”unlessthemarketisgoingintoanastycorrection.Ifthedipispromptedbyanationalorglobalnewsstory,addingonthediporgapdownneartheopenusuallyworkswell.RitchieII: This is a bit of a loaded question as I don’t think there is anydoubtthatthecurrentmarketstructureplacesrestingstopordersasatargetformarketmakerstoshootat.Sotherealquestionis,whatisthebestwaytoavoidbeingscrewed?Theansweristoatleasttryandnotplacestopsthatareclosetothemarket,especiallyinsmallertomid-capnames.Ifit’saveryliquidname,Idon’tthinkthere’snearlyasmuchanissue.Lastly,Iwouldstronglyadvisethatmentalstopsshouldbeusedbydisciplined

professionalsonly!Ifyouhaveaproblemobeyingyourownstopprotocols,thenyoudefinitely shouldnot beusingmental stops. If you are at thepointwhereadherencetostopsisnotanissue,onlythenwouldIstarttoleantowardusingmentalstops.

S8-8:Whatstopdoyouusewhenastockhasbrokenoutbuttheobvioussupportis15–20%belowtheprice?Woulda10%stopgiveenoughroombutstillbetightenoughtocontrolrisk?Minervini:Iwouldhopetobeoutofapositionbeforea10%loss;Irarelyallowastocktodrop10%.Idon’tcarewhere“support”is;I’mnevergoingtorisk15–20%onatradeever!Ifsupportistoofarawaytouseasastoplevel,IsimplyuseapercentagestopthatI’mcomfortablewith.Ryan:Onmostoccasions, Iwon’tbuyastock in that situationbecause it istooextended.Iliketohavesometechnicalsupport,abase,amovingaverage,atrendlinesomewhereintheareaofmypurchase.Zanger:IfIstuckwitha10%stoplossinthissituation,Iwouldbebrokebynow.A2–3%stoplossisclosertowhatIactuallyuse.Heck,Ioftensellstocksthatarenowhereneartheirstopsjustforactingfeeblyontheirbreakouts.Theyaren’tshowingthestrengthIexpectfromthoroughbreds.Whywaitforastockto

roll over and bark like a dog? I say sell the damn thing while it’s still upwobblingonthatfeeblebreakout!RitchieII:Well, thenatureof thequestion sounds like Iwouldbebuyingsomethingthatisalreadyquiteextended,whichasIruleIdon’tdo.However,ifIweretobuysomethingthatdoesn’thaveaveryclearstopareathatistight,Iwould favor a percentage stop based uponmy average loss, and Iwould startwithasmallersizethannormal,knowingthattheoddsofmygettingstoppedareprobablyhigher.

S8-9:Whatifastockhitsyourstoponveryanemicvolume;doyoustillcutyourloss,ordoyouholdoffandmaybegivethestockabitmoreroom?Minervini:Whenthestockpricehitsmystop,I’mout—period!Mygoalistoprotectmyaccountatalevelthatmakesmathematicalsense.Themathisthesameregardlessofvolume.Ryan:Sell.Nevergivethestockmoreroom.Youdothat,andyouwillstartrationalizing every loss in your portfolio. Soon your losses will get out ofcontrol.Zanger: It’s a situational decision that would depend on what the overallmarket is doing and things like the normal volatility of the stock itself. At aminimum,Iwouldreduce30–40%andseewhathappens.RitchieII: If a stockhits apredetermined stoppoint, Iwill almost alwaystrimsome,althoughifit’sverytightandthestockispullinginonnovolume,Imaywaitabit,especiallyifit’samid-tosmaller-capname.Ingeneral,Itrynottoevergivestocksmore roomon the flyandhavealreadydecidedhowmuchroomI’mwillingtogiveastockbeforehand.

S8-10:Howdoyoudealwithgettingwhippedoutoftradesinaback-and-forthmarket?Minervini:Ifyou’regettingwhippedoutexcessively,thenoneoftwothingsis wrong. Either your selection criteria are flawed, or the general market ishostile. You shouldn’t have too many whipsaws if you’re applying sound

principlesatthecorrecttime.Awhipsawmarketismoredangerousthanabearmarket,becauseinabearmarketyousimplygetstoppedoutofeverythingandgo to cash because nothing sets up long. In awhipsawmarket you can sufferwhatiscalled“deathbyathousandcuts,”goinginandout,takingmanysmalllossesasstocksemergeandthenfallbackoverandoveragain.Ryan:Thetoughestmarkettodealwithisawhipsawmarket.Breakoutsrarelywork,andbreakdownsdon’twork,andsoyoucangethurtonthelongsideandtheshortside.WhenIseethatstartingtodevelop,Icutmyexposuredownandtrade in amuch smaller size. I also look to buymore leading stocks during apullingbackandnot asmanywhen theyarebreakingout.Thekey is tohavepatienceandtowaitforthepropersetup.Don’tforcetradeswhenthesetupsarejustnotthere.Zanger:AssoonasIcandiscernthatthemarkethasstartedachoppyphaseand therefore is lacking a clear trend, I usually stay away from the marketentirely.Iwillwaitpatientlyonthesidelineswithmycashforanewtrendup.ThebestadviceIcangivetonewtradersistostayawayfromchoppymarketsatallcosts.Longorshort,chopwilleatyoualive.Choppymarketscan lastninemonthstoayearormore.RitchieII: This is actually the toughest kind of environment formy style,especiallywhenthemarketissidewaysorgrindinghigherbutwithlargermovesbackandforth in thegeneralmarket,because individualstockscanexperiencelarger whipsaws than the general. The answer is pretty simple; if I’m gettingwhippedaroundalot,Itradesmalleruntilthingsimprove.

S8-11:Howdoyouhandleatradeifthere’sanunexpectedevent?Sayyouboughtat$20andplacedastopat$19,butthestockgappeddownto$15onnews.Minervini:Whenmystopishit,Isell,plainandsimple.Otherwise,thereisnosenseinhavingastopinthefirstplace.Slippageispartoftrading.ButevenwhenIaddinslippage,mylossesarequitesmall.

Ryan: If it isunexpectednews,sometimestheopeningofagapdownis thelowandthestockstartstorallyhigher.Ihavealreadysufferedabigloss,andIwanttogivethestockthefirst30minutestoseeifthereisanychancetherewastoo big an overreaction. If it rallies backmore than 50% of the day’s drop, Imightholditanotherdayandseeifitralliesmore.Ifitgoesthroughthelowofthefirst30minutes, thenIamout.Youjustdon’twant tohaveabad lossgetworse.Zanger:Onagapdownlikethis,Iusuallywaitfordipbuyerstocomeintolift the stock up $1 or $2, and then I start selling until there is nothing left. Imoveontothenextstockthatissettingupanddon’tgiveitanotherthought.Astockexperiencingthatkindofagapdownistoast.Moveon;itdoesn’tloveyouanymore,anditmovedoutwithyourcat.Getoveritandmoveon!RitchieII:Sell!

SECTIONNINE

TradeManagement

S9-1:Doyouevertradearoundacoreposition?Minervini:Yes.Isometimeswilltakeanoversizedpositioninastockwithaverylow-riskentrypoint,andifthestockmovesupquickly,Imaytakeofftheexcess and nail down a short-term profit. This makes it easier to hold theremaining position, because I already logged a partial profit that serves as acushion.On the flip side, if I take an oversized position and the trademovesagainstme,Icuttheoverweightveryquickly.Youdon’twanttobeoverweightwhenthingsaremovingagainstyouandunderweightwhenthingsareworking.Youwanttoaccomplishjusttheopposite.Ryan:Itradearoundacorepositionallthetime.It’slikedrivingacar:WhenI see a green light, I step on the gas and initiate or increase my position. Ifconditions change and I see a yellow light ahead, I might cut back on mypositionuntilIseegreenagain.Ifastockstartstobreakdownandthelightgoesred,thenIwillsellthewholeposition.Youadjustaccordingtohowthestockisacting.Zanger:Itypicallyhaveoneortwomassivewinnersayear.Afterthestockmovesup20–30%,Ishedsomestock,andifitpullsbacktothe10-dayMAorthe 21-day MA line, I sometimes like to add back small amounts if I getindicationsthatit’sstillactingunusuallystrong.However,I’mmoreinclinedtoshedstockonthewayupandnotaddanyback.AsImentionedearlier,addingathigherpricelevelsraisesmycostbasis,andifthestockweretoplunge,Iwouldbeunderwatermuchmorequicklyandforcedtosell.RitchieII: This is something I’m always trying to get better at.Usually Ionly trade around a position in one of twoways. The first is when the stockhasn’t really gotten going yet, where I will often buy and then the stock

consolidates;thenIwillhavetoreduceitifitdoesn’tfollowthroughandmaybeadditbackifittriestoreemergeagain.Theothersituation,andmorepreferable,iswheremyprofit is atmore than two timeswhat I risked and I trade out ofsomeshares;thenIlooktoaddbackwhatIsoldatalaterperiodifthestockactswellandconsolidatesagainconstructively.

S9-2:Canyouwalkusthrougharecentwinningandlosingtrade?Minervini:A trade thatworkedoutprettynicelywasMichaelsCompanies(MIK);thestockwasarecentnewissue.IboughtitonNovember6,2014,asitemergedfromaclassicvolatilitycontractionpattern(VCP).Thestockclosedup13outof16days;itadvancedabout60%inlessthanfourmonths.Itradedoutofitearlier,butstillmadeanice,quickswingprofit(seeChart9.1).

Chart9.1MichaelsCompanies(MIK),2014–2015

Anexampleofan interesting loss ismyrecentTwitter Inc. (TWTR)trade. I

built a position between lateMarch and early April 2015. The stock held uprelativelywelluntilApril28whenearningsweresupposedtobereportedaftertheclose;butinstead,earningsleakedoutduringtheday,andthestockstartedsellingoff.Ihadalreadysoldsomeearlyinthedayandthensoldmyremainingshares just sixminutesbefore the stockwashalted. It then reopenedon agapdownof15%;Ionlylost0.16%onthewholetrade(seeChart9.2).ThereasonwhythissmalllossissosweetisbecauseIwasgoingtoholdintoearnings,sothe leak actually savedme fromwhat probably would have been a large gapdownthenextmorning.

Chart9.2TwitterInc.(TWTR),2015

Ryan:Ambarella Inc. (AMBA) is a stock I bought onMarch2, 2015, on aniceincreaseinvolume.Itbrokeaboveallbutthreedaysoftradinginthebase.Youcanbuyalittleearlywhenthestockexceeds90%ofthebasingarea.You

don’t alwayswait for the all-time high.The stock had somehuge volume thenexttwodaystogiveitthemomentumtocontinueitsmove.IthensoldoutonApril24,2015,when it startedbreakingdownfromabase ithad formedoverthepriorfourweeks.IagainboughtitbackonMay15,2015,butsolditonJune10,2015,asitlookedasifithadgonethroughaclimacticmove(seeChart9.3).The stockmoved40% inaperiodof threeweeks, and that ison topof a15×movesinceitsIPOpriceinOctober2012.

Chart9.3AmbarellaInc.(AMBA),2015

FiestaRestaurantGroup Inc. (FRGI)was a losing trade. I bought the stocktrying to emerge out of a base onMarch 20, 2015. The stock had increasingvolumebutstartedtostall.Itclosednearthelowoftheday,whichisalwaysabadsignwhenastockistryingtobreakout.Ishouldhavepaidmoreattentionto

the reversal on February 20, 2015, on the biggest volume ever traded in thestock.Thatwastoomuchtoovercome.Thestocktriedagaintomoveduringthenextfewdays,butthedemandwasnotthere.IsoldonMarch25,2015.Thenextday itbroke the50-daymovingaverageon tremendousvolume,and the stockhasbeeninadowntrendeversince,droppingmorethan25%(seeChart9.4).

Chart9.4FiestaRestaurantGroupInc.(FRGI),2015

Zanger:PharmacyclicsInc.(PCYC)wasabigrunnerforafewyears.Ilisteditonmywebsiteat$15,anditranforafewyearsandgotupto$150andthenrested for a good sixmonths. It then proceeded tomoveout of the six-monthbaseandripto$168ish,whereitrestedfortwoweekswaitingforearnings.This two-week rest gave this stock a very nice high-level bull flag–like

pattern.Afterearnings,thestocksoared$12andthenpulledbackintothatupper

flag-likearea.Ilikedtheearnings,andthegroupwasverystrong,soIaddedonthepullbackat the$170–$173area.Afewdays later thestockstarted tosoar,and itkept racingupand finallygotabuyoutoffer fromAbbVie (ABBV) for$258pershare.Thatwasan$80+gaininjustafewweeks(seeChart9.5).

Chart9.5PharmacyclicsInc.(PCYC),2015

ArecentlosingtradeillustrateshowquicklyI’mwillingtogetoutastockifit’snotworkingoutasexpected.IboughtCyberArk(CYBR)asthestockbrokeadescendingchannelpatternwithincreasingvolumeonJune8,2015.Thepricethen cleared into new highs but reversed and failed, and Iwas stopped $1.50belowthebuypoint(seeChart9.6).Ritchie II: One of my better recent winning trades was in Qualys Inc.(QLYS). This was one ofmy first purchases after coming out of a defensive

100%cashpositionafterthemarketcorrectioninOctober2014.IpurchasedthestockonOctober28,2014,asitstartedtomoveabovethe$29level,anditneverlookedback.

Chart9.6CyberArkSoftware(CYBR),2015

I liked thisnamebecause ithadheldupwellduring thecorrectiveperiod inthemarket and alsobecause it hadbig earnings and sales andwaspart of theInternetsecuritygroupthatIwasaprettybigfanof.IscaledoutofhalfthetradeonNovember4,2014,afteranearly20%gain,movedmystoptothebreakeven,andplayedtheremainderforamuchlargermove,whichIsoldonFebruary10,2015(seeChart9.7).

Chart9.7QualysInc.(QLYS),2014–2015

Arecent losing tradewas inLululemonAthleticaInc. (LULU).Ibought thestockonFebruary27,2015,asitstartedtobreakoutabovethe$68level.Butitneverreallyhadanyfollow-through,andIsubsequentlystoppedmyselfoutonMarch 3, 2015, when the stock took out its previous week’s low and closedpoorly (seeChart 9.8). Ironically,GoldmanSachsdowngraded the stock threedayslater—alwaysinterestingtoobservehowthemarketseemedtoknowthatsomethinglikethatwascoming.

Chart9.8LululemonAthleticaInc.(LULU),2015

S9-3:Whatisyourtradingtimeframe;howlongdoyoutypicallyholdamomentumstock?Minervini:Onaverage,mywinnersareheld for two to three times longerthanmylosers.Mywinnerscanbeheldfortwoorthreequartersbutrarelyforyears. The largest part of a big stockmove generally occurs within 12 to 24months. If you time the trade right, you can get a pretty goodmove in shortorder.I’mlookingtocompoundmymoneyveryrapidly,soIswing-tradeinandoutofstocksandrarelyholdthroughgood-sizecorrections.Ryan:Onwinnersitwouldbeweekstomonths,andforlosersitisdaystoafew weeks. My best stocks are those that show an immediate gain, and mybiggestwinners are theones I hold the longest. Iwant toholdmywinners aslongasIcan.Idon’tday-trade.Idomuchbetterbuyingastockandholdingitas

longasthestockisinaniceuptrend.Thattimeperiodcouldbeweeks,months,orlongerthanayear.Intoday’smarket,I’mholdingthemusuallyforweeksormonths.Inevergetlockedintoatimeperiod.Ifastockhitsmystop-losspointthedayafterIbuyit,Iwillsellitout.Zanger: Holding times are generally decided by how strong the overallmarket isandhowfreshorold thebullmarkethappens tobe. I typicallyholdgood strong stocks for no more than 90 days in a strong bull market andoftentimes for far shorter periods.Losers last one day, possibly two days at amaximum.RitchieII:Theaverageholdtimevariespertrade,butoverthelastfiveyearsmyaverageholdtimeforlosingtradeshasbeenonlytwotothreedays,andmyaveragehold timeforwinning trades isbetweeneightandnine tradingdays. Ialwaystakelossesveryquickly,butIrarelytakeprofitsthesameway.Forme,every trade entry starts as a short-term trade, and then based upon the priceactionandhowwellIlikethesituationwilloftendeterminehowlongIwilllooktoholdaposition.Ifastockbreaksoutbigrightaway,I’mmoreapttotryandplaythestockforamuchlargermovebecausethebestsituationsalwaysseemtohaveawayofputtingmeataprofitrightaway.

S9-4:Willyoueveraddtoyourpositionwhenit’sdown?Minervini:Almostnever.TheonlytimeIaddtoa losingpositioniswhenI’mbuildingmypositiononapullback,andeventhen,Iaddonthewaybackupand only if the stock is very close tomy original purchase price. I never buymoreofastockthatisshowingmeabigloss.Ryan: I never add to apositionwhere I have a loss. I have alreadymade amistake;whycompounditbyaddingmoretotheposition?Icannotstandlosingpositionsinmyportfolio.They’relikeacancer;thelosseshavetobecutoutandnotaddedto.Theequityinyourportfoliohastobeconstantlyrotatedfromtheloserstothewinners.Zanger:Ican’tsayI’lladdtoanypositionwhenthestockisdown,sinceit

might go lower still. It’s just not something I do. In fact, I ammore likely toreducewhenastockisdown.Ilookforstrength,notweakness,topurchase.RitchieII:Ineveraveragedownonastock.S9-5:Howmuchaboveyourentrypricedoesastockhavetoadvanceinordertobeconsideredextendedsuchthatyouwillnolongeraddtoit?Minervini:Onceit’safewpercentagepointsbeyondthebuypoint,Ileaveitalone. I’mlooking togetmypositiononrightat thecorrectbuypoint. Idon’tchasestocks.Ryan:Ifyouareinastrongbullmarket,Iwillbuyupto10%fromitsoriginalbuypoint.Ifitisaweakmarketandyouaren’tgettingmuchfollow-through,5%wouldbemylimit.Zanger:Ifastockisup20%ormorefromitsrecentbasebreakout,Iwouldnotconsideraddingmoresharesnomatterwhattheenticements.Theoddsdon’tfavoryouthereliketheydofromthebasebreakout.RitchieII: Itdependsmoreuponwhat thestock looks like technically;butusually if a stock isupmore than5%beyond itsbreakout, Iwon’taddunlessthere’saconsolidationperiod.

S9-6:Ifyouhavealargegaininastock,butitsetsupagain,wouldyoubuymore?Minervini:Yes,butusuallyinasmalleramountthanmypreviouspurchase.Idon’twanttorunupmyaveragecost.Ryan:Yes,thebigmoneyismadewhenastockmakesmultiplemovesduringayearortwoandhasanumberofbasesalongtheway.Zanger: If Ihavea largegain inastock, Iwould’vesoldoutwaybefore itsetsupagain.However,onthesecondbreakoutIwouldprobablybuylesssincethestockismoreexpensivefromthepreviousrun.Thefirstbreakoutisusuallythebest,asinstitutionsdidn’thaveenoughsharesonthefirstbreakoutandwerethedrivingforcebehindalotofthedemandthatpushedthestockup.

RitchieII:IfI’mridingastockforabiggermove,Iwilldefinitelybuymoreif it setsup,butusually I tradearoundacoreposition that Iwant tohold.Forexample,sayIthinkastockcouldmoveup30–50%,butitrips15–20%injustafewdays; Imay tradeoutof someof it, and if the stockconsolidatesorpullsbackinanorderlyway,I’lladdsharesbacktoit.Iusuallydon’tholdmyentirepositionforabigmoveandthenaddalotmoreathigherprices.

S9-7:Doyoueverbuyputoptions(puts)asahedgetoprotectorlockinalargegainthatyoudon’twanttosellfortaxreasons,orifyou’reonlyexpectingamodestmarketpullback?Minervini:Almostnever.IoccasionallywillbuyanETFtoshortthemarketinaneffort tohedge if Ihavemanynames inmyportfolioandwant to avoidsellingdownabunchof stocks to reducemyexposureacross theboard.But Iprefertostayconcentratedinonlyahandfulofnames,whichallowsmetomovein and out and changemy exposure quicklywithout having to complicate theequation.Ryan:Rarely.Itrytokeepthingssimple.Ibuy,sell,short,andcoverstocks.OccasionallyIbuyoptions.Zanger: Since I’m a “mark-to-market” trader per IRS rules,my account istabulatedonallgainsorlossesonDecember31ofeachyear,sohedgingfortaxreasons at the end of the year doesme no good. And since I’m a short-termtraderoverall,Ineverholdastocklongenoughtoqualifyforcapitalgainstaxesversus ordinary gains. Therefore, I never hedge for tax purposes, and I neverhedgeonamarketpullback.Ritchie II: For starters, I don’t make trading decisions based upon “taxreasons,” as I think it doesn’t make sense to let potential tax implicationsinfluenceshorter-termtradingdecisions. Inregard toputoptionsspecifically, Idon’tbuythemasahedgeagainstlongs;ifI’mnervousaboutbeingtoolongorhavingagainthatisextended,IwilljusttrimtheunderlyingpositiontothepointthatInolongerfeeluneasyaboutit.

S9-8:Whenyou’vereachedadesiredprofit,doyouscaleoutwithtrailingstops?Minervini:WhenI’matadecentprofit,Iusuallysellintostrengthbeforethestockhasachancetomoveagainstmeandhitsmystoponweakness.My“sellhalf rule” is awin-win solution. If youget indecisive aboutwhether or not toholdaposition,apsychologicalwin-winistosellhalf;ifthestockgoeshigher,youcansay thankGodIheldhalf. If thestockgoesdown,youcansay thankGodIsoldhalf.Eitherdirectionthestockgoes,you’recorrect.IfIreallylikeastock,Isometimeswillsellhalfandmovemystoptothebreakevenpoint.Thisallowsmetoessentially“free-roll”thesecondhalf.Ryan: It depends onwhat themove up looked like. If the stock had a fastmoveup,Imightsellsomeintostrengthandthenmoveupmystopontherestoftheposition.IfithasbeenasteadyuptrendandIhavebeenmovingupmystopasthestockrises,Iwouldsellitallatoncewhenthestockhitsmystop.Zanger: Idon’tusetrailingstops,asIusuallysell intostrengthonupdays,andIhope I’mcompletelyoutorhavegreatly reducedmypositionbefore it’stoppedout.IfI’mnotcompletelyout,Imightthenuseabreakofsomemovingaverage line like the21-dayMAline tosellout the lastofmyposition.Whentrading large positions or thinly traded stocks, it’s far easier to reduce intovolume spikes after the stockhasmadea substantial run than to sell ondowndayswithorwithoutvolume.RitchieII: Idoscaleoutbutnotwith trailingstops. Idon’tuse traditionaltrailingstopswhereastopisrestingbelowthemarket,butImaysetalevelinmyheadwherebyIwillcutpartof theposition if it startsgivingup toomuchground.IdeallyIscaleoutintostrength.

S9-9:Shouldyouusetrailingstopsifyouareunabletomonitorthemarketsfull-time?Minervini:Yes,youcoulddo that.But trynot tochokeoff the tradeearlyon.Onceyou’reatadecentprofit, thenitcouldbetimetocinchupyourstop.

Onparabolicmoves,Itightenmystopsconsiderablybecausepullbackstendtobelargerthesteeperthestockmovesup.Ryan:You should checkyour stocks everydayor everyotherday tomoveyourstopsupifneedbe.Ihaveneverhadapercentagetrailingstoponastock,but Idousemovingaverages, trendlines,andvolume toplacemystops.Withtoday’stechnology,youcaneasilycheckyourstopsonyourphoneandchangethemifyouwant.Zanger:Settingmechanicalstopswiththerestoftheherdusuallyenticesthemarketmakers todrop the stockwith someartificial pricenoise andgrab thatstockatthecheaperpricewhereweclusteredourstops.Itriedmechanicalstopsonce in the early 1990s, but once I sawhoweasy itwas for someone to grabstock from me at a discount, I never did that again. I think it’s absolutelynecessary that you keep eyes on your stock at all times and know what themarketisdoingoveralltojudgethebestexits.Again,IwoulduseabreakofoneoftheareasthatInotedasastopbutneverapresetstoponatradingplatformthatbypassesmyreadofthecurrentmarket.RitchieII:Thisisreallyafunctionofyourplanandhowconcentratedyouare. If you are in fairly concentrated positions, then I think you have to havesomeformofstopprotectioninthemarkettokeepyoufrompotentiallyhavinglargelosses.Nowonecouldprobablyarguethatyourconcentrationlevelinyourportfolioshouldbecommensuratewiththeconcentrationlevelyouhavewiththeactualmarket,sothelessattentionyoupay,thelessconcentratedyoushouldbe.Inthecaseofsmallerpositions,Idon’tthinkyouhavetohavestopsnecessarilyresting,althoughIwouldatleastwantsomeformofintradayalertsenttoyoure-mailorphonethatyoucouldpotentiallyactupon.

S9-10:Doyoueveradjustyourstopsonceyourstockisclosetoreachingyourprofittarget—i.e.,doyouadjustyourstoptobreakevenorkeeptheoriginallevel?Minervini: I’m always working to improve my stop while trying not to

choke off the trade prematurely. If a stock moves up significantly, I willdefinitelymovemystoptoatleastmybreakevenpoint.I’mnevergoingtoletabig gain turn into a loss. My process is to protect my gain once the stockadvancesamultipleofmyriskorabovemyaveragegain.Idon’tusuallymovemystoptothebreakevenpointuntilthepriceadvancestoamultipleofmyriskorabovemyhistoricalaveragegain.Ryan: Ionlyadjust thestopin thedirectionof the trade.Soif thestockhashadamoveofmore than5%, I sometimesmove thestopup to thebreakevenpointoratleastclosertoitthanwhereIhaditonmyoriginalpurchase.Inevermoveastop thatwould increase theamountof loss that Imight takefrommyoriginalpurchase.Zanger: Idon’tusuallyhaveapresetgoal,butasthestockprogressesup,Ireduce in stages. If a stock has run for a fewmonths, I typicallywould havereduced my position by at least 50% within that time and would be outcompletelybeforeearningswereannounced.RitchieII:Idon’tusuallyhaveapredeterminedtargetforastock;however,Iusuallydon’twanttotakeprofitslessthanmyaveragewin,atleastintostrength.Sointhatregard,ifthestockispastmyaveragewin,thenIwillmovethestoptothebreakevenpoint,asmyphilosophyandtradingplandictatethatIdon’twanttoletabetter-than-averagewinnerturnintoaloss.

S9-11:Doyousetpricetargetsonyourtrades,takingsomeoffthetablewhenthestockreachesthattarget,orareyoumoreapttoonlysellwhenthecharttellsyouto?Minervini:Irarelysettargets.IwatchthechartandalsohowmuchI’mupversushowmuchIrisked.IbuywhenIthinkthepotentialrewardoutweighsmyrisk,andIsellwhenIthinkthedownsideriskoutweighsthereward.ImaysellifIachieveamultipleofmyrisk,usuallysomewherebetweentwoandsixtimesmystoploss;atthatpointIfollowthestockupwithabackstop.Ryan:Iammoreapttosellwhenthechartstartsbreakingsupportpoints.The

problemaboutsettingpricetargetsisthatthebeststocksusuallyendupgoingalotfurtherthananyoneexpects.That20%profityoutookmightfeelgoodatthetimebutthenbecomeverypainfulwhenthatstockmovesup300%.However,alotdependsonhowquicklyastockmakesthatfirstmove,howbigtheearningsare,andwhatthegeneralmarketisdoing.Zanger:Therealproblemwithpricetargetsisthatifyousetatargetof$80andthestockrunsto$120,you’vemissedalargemove.Ihavesettargetsinthepastandlikelywilldosoagaininthefuture,butthestockactiontrumpstargetsfor me. Targets are typically predicated on historical or statistical behavior,which ismoreor lessaveragebehavior.The realwinnerswhereyoumake thebigmoneyarefarfromaverage.Targetsarelikeshootingawinninghorseatthestartinggate.RitchieII: In regard toselling intostrength,myminimumtargetwouldbeabovemyaveragegain,whichisusuallytwotimesmyriskormore.ButIdon’tusuallysetarbitrarytargetsfortakingprofits,asIliketoseethepriceactionandhowit’sactingrelativetootherstocksinmyportfoliooronmywatchlist.

S9-12:Doyoueversellaweak-actingstockbeforeithitsyourstop?Whatfactorswouldcauseyoutosellearly?Minervini: I have a list of “violations” that I look for right after I buy astock. If the stock breaks out on low volume and comes back in on heavyvolume, that’saviolation.Threeor four lower lowswithno supportiveactionareaviolation.Aclosebelowthe20-daymovingaverageorworsethe50-daylinerightafterabreakoutisanotherviolation.Lackoffollow-throughandmoredowndaysthanupdaysareviolations.Iftheseviolationsstartpilingup,Imaysellthestockevenbeforemystopishit.Ryan:Yes,Isometimessellbeforethepricehitsmystopbecauseofanumberoffactors.Generalmarketaveragescouldberollingover,orastockwithin itsgroup is indicating conditions are changing. Itmight even be that the relativestrength of the stock has been dropping and I have better-acting stocks that I

couldmovemoneyto.Iwanttogiveastocktimetomakeamovebutdon’twantmycapitaltobesittinginsomethingthatisgoingsidewaysfortoolong.Generalmarketweaknessisusuallythemainreason,butitcouldbegroupweaknessorjusttoomanystocksblowingupwhenearningshavebeenreported.Zanger:Amarketbreakisoneofthemoresignificantones.Havingthestockstalloutorcrossbelowoneofmymovingaveragelinesoranelevatedtrendlinecouldtriggeranexitaswell.IsellweakstocksassoonasIdeterminethattheyare weakening. Weak stocks tend to roll over fast and tie up your cash,preventingyoufromacquiringbetter-movingstocks.I’velearnedit’sbesteithertoselloutofthemrightawayandmoveintoothersthatareactingfarbetterortostayincash.RitchieII:Yes, ifastockbreaksoutandjuststallswithnofollow-throughandIwanttoaddanothernamebutdon’twanttoaddmoretotalexposuretomyportfolio, I will sometimes cut one stock to buy another. Also, if the stockdoesn’tdowhatIexpected—whichistobreakoutandgoquickly,butitjustsits—Imaycutitout,knowingthatIcanbuyitbackifitbreaksoutagain.Let’ssayIaminfivepositions,I’vebeenstoppedonthreeorfourofthem,the

generalmarket is acting very poorly, and I’m seeing distribution in themajoraverages,plusotherstocksonmywatchlistareactingpoorly.ImaymakethedecisiontojustmovetocashandselloutanyremainingholdingsIhavebeforetheyhittheirpredeterminedstops.

S9-13:Doyoueversellastocksimplybecauseyourealizedyoumadeamistakeandmadeapoorbuydecision?Minervini: Absolutely! The minute you realize you’ve made a mistake,correct it. I’m looking to compoundmoney, notmistakes. Holdingwhen youknowyou’vemadeamistakeisillogical.Ryan:Yes,oneofthemostimportanttraitsaninvestorcanhaveistheabilitytoadmitamistakeandtakeassmallalossaspossible.Bigegosinthemarketleadtobiglosses.Tofightwiththemarketandnotbeflexibleenoughtoadmit

to amistakewill just lead to serious losses.Most doctorsmake bad investorsbecausetheycanrarelyadmittoamistake,becauseintheirprofessionadmittingamistakewouldprobablygetthemsued.Zanger:Absolutely,andthefasterIsellthatpieceofjunkandmoveontoagreatmover,thebetterI’llsleep.RitchieII:Ican’tthinkofatimewhenI’vedonethat,butIcertainlywouldgetoutimmediatelyifImadeareallyfoolishpurchase.

S9-14:Howdoyoudecidewhentosellawinningstockthatisupsubstantiallyandstartstopullback,especiallyifthemarketuptrendisintact?Minervini:Thereisn’tafixedpercentage.Mybasicruleofthumbistoneverletadecentprofit turnintoaloss.If thestockhasnotmovedupmuch,Istickwithmyoriginalstop.ButonceI’veattainedagood-sizeprofit,Igointoprofitprotectionmode.OnceI’matadecentgain,Iprotectitbybackstoppingagoodpartofthegain.IwouldhopethatI’dalreadysoldsomeintostrength,whichismypreferredmethod.Ryan:ItisusuallynotapercentagepullbackthatIamlookingtosellbutsometechnical or fundamental change that takes place. I don’t usuallymake all-or-nothingdecisions,especiallyonwinningpositions,butinsteadIscaleinandoutof them. If somethinghashadabigmoveand is extendedand looks like it isstarting topullback, Imightsellaportionof theposition,but Ineverwant toloseaposition ina stock that looks likea leader.Onceyousellout theentireposition,sometimesyoucanmissthenextmovehigher.Zanger: That really depends on many factors. What percentage of myportfolio is comprised of that stock?How steep is the angle of ascent on thechart,howfarhasthestockrun,andhowliquidis it?Thesteepertheangleofascent and themore it has become extended from the breakout area, the lessroomIgive it.Forexample, if thestock ismovingupata30degreeangleofascentanditconsumesamodestpercentageofmyportfolio,I’mlikelytogiveit

much more room. And yes, implied in that statement is my observation thatchartsshowingsteeperascentaremorevolatile.Many tradersuseabreakof the10-daysimplemovingaverage (SMA) line,

which I use occasionally, or the 21-day SMA line as a sell point. Both areeffectiveandareusedoftenbymeandothers.Icanalsouseanelevatedrisingtrendlineorakeyreversalbar.Ineverholdmyselftoasingletool;mytoolboxisopenatalltimes,andIusetherighttoolthatfitsthesituation.RitchieII:This isoneof theharderpartsof swing trading inmyopinion,because often the stocks you take the biggest profits onwind up goingmuchhigher.TheanswerliesmoreintheamountofwhatIcall“normal”actionyou’rewilling to stomach. For example, if a stock runs up substantially with nopullbacks, then a larger pullback would be normal. If you don’t want to sitthroughit, thenyouhavetotrimyourpositiontoa level thatyou’rewillingtoholdthrough.IdeallyIlookmoreatvolumeonthepullbackthanastrictpercentage,butifa

stockhashad,say,morethana20%movewithnopullback,thenitshouldnotgivebackmorethan,say,two-thirdsofthemove,andtheharderitpullsin,themore I’m going to want to see it bounce back right away. The price actionshouldalwaysbeconfirmingtotheupsideandideallywithvolumeregardlessofhowmuchitpullsin.Ifastockpullsinonabove-averagevolumeandjustsitsthere,thenthat’sasignthatit’satleastnotbeingcurrentlyaccumulated.

S9-15:Howdoyouhandlethethinlinebetweentakingprofitsintostrengthandlettingyourwinnersrun?Minervini: I don’t concern myself with getting the high, which is rarelypossible; I sell when I think the risk-reward proposition has changed frompositivetonegative.Atthebeginningofanewbullmarket,I’mmorelikelytolet awinner run.But I typically trade out of anywhere between one-third andone-halftoasmuchas75percentofapositiononaswingtradeandthenholdtheremainingsharesforabiggermove.Withanewmarketleader,Iwilloften

usethe50-daylineasatrailingsellpoint.Ryan:Thatisajudgmentcallbasedonhowstrongthestockhasbeen.Ifithasjusthadaclimacticmoveof30%inamatterofthreeweeksafterithasalreadyhadamoveforoverayear,Iwoulddefinitelystartselling.Ifitisthefirstmovecomingoutofalongbase,thenIwouldcontinuetoholdit.Zanger: It’s all about price behavior forme. Stocks can run quickly for aweekortwoandthenfalllikeabrickwhileotherscontinuetorunmonthsmore.Ithinkit’sbesttoreduceintofastmoversuntilyoufindyourwin-winsituation.Bythis,ImeanifthestockrunsupandIsell50%ofmypositionandthenthestockcomesbackdowntomyoriginalbuyarea,Icanselltherestandstillwalkawaywithatidygain.Ontheotherhand,ifItake50%offafterasharprunandthestockcontinuestorun,I’mstillwinningwiththeremaining50%.RitchieII:Itryandfindharmonyinboth.HereIthinkknowingandhavingareasonableexpectationbaseduponyourtradingmetricsisessential.Everykindofpositiontraderthatistryingtomakemoreonhisorherrespectivegainshastolet the winners ride to a degree, but how far and for how long is the realquestion.Thekeyistoletthewinnersrunrelativetotheirlossessothatthenetexpectancyispositive.Ifyouaretakingverysmalllosses,youmayonlyhavetoletgainsrideacoupleofdays,andyoucanstillsellagoodmajorityofthemintostrength;don’tgetwrappedupintheideaofhavingtocatchanentiremoveinorder tobesuccessful.You justhave tocatchenoughofamoveso that itcanmorethanoffsetyouraveragelossexpectations,andyououghttobeabletodothatoftenbysellingintostrength.

S9-16:Isthereatimetoholdastockforalargemoveversustotradeoutandtakeaswingprofit?Minervini: First, you should define your trading style; are you a trader orinvestor? You can trade around positions, but if you don’t decide on a style,you’re going to drive yourself nuts.When a stock goes higher, youwill kickyourself for not holding; and when you hold and it goes lower, you will be

wishingyouhadsold.Thekeyistomakeadecentgainandtokeepyourlossessmallerthanyourwinners.Duringthebeginningstagesofanewbullmarketisthe best time to hold, and in the late stages of a bull market—usually afterseveralyears—isthebesttimetotradeshorter-termmovesandsellintostrength.Ryan:Ifyouareatthestartofanewbullmarketandyouhavesomeleadingstocksinyourportfolio,youshouldholdforthelongermove.Ifastockhasbeenmoving for a long time and has had numerous bases, then youmightwant tothinkaboutjusttradingthatmove.Zanger:When theFedstarts to reduce interest rates, I’mmore likely to letstocks run for a longer period of time. Unless of course, we are in a majormeltdownlike2001,wheretheFedstartedtolowerratesafteramassivebubbleandstocksstillplunged.TheNasdaqgaveup80%ofitsvalue.NaturallyIwouldhaveadjustedthestrategyaccordingly.RitchieII:ThisissomethingI’mcontinuingtotryandimproveupon,butingeneral therearesituationswhereI tryanddothis,andthisisoneofthemainreasons I trynot tohave static targetsonanything Ibuyuponentry.The firstthingIwanttoseeishowthestockactswhenIbuyit.Someofthebesttradestend toputmeunder little tonopressure almost immediately; if the timing isperfect, theymaynevereven tradebelowmyentryprice.That is the first andmostimportantreasontopotentiallyholdforabiggergain.Otherfactorswouldincludewhattypeoftechnicalpatternit’scomingoutof,howbigthestockisintermsofmarketcap,howwellit’sfollowed,whatitsearningsandsalesare,andwhatgroupit’sin.

S9-17:Doyoueveruseatimestop?Minervini:MytimestopsaregenerallybasedonmyinitialentryandwhatIexpect to happen. For example, if the 6:05 train that you take to work eachmorninghasnot arrived in the station and it’s now7:45, you can assume thatsomething has probably gone wrong. With my trading, it’s based on thedifferencebetweenmyassumptionandwhatactuallytakesplace.Let’sjustsay

that I likemy trains to come in on schedule. I will often sell a stock simplybecauseitdidnotdowhatIexpected.Ryan:No.Ijudgethemovementofastockrelativetootherleaders.Ifitisn’tmoving higher while other are, its relative strength will drop, and I willeventuallysellitout.SoIdon’thaveaspecifictimeframeofXamountofdaysorweeksthatIuse.Zanger: That depends on themove of the stock, but I do reducewhen themoveislonginthetooth,whichissimilarinconcepttoatimestop.RitchieII:Sometimestheshortermytimeframeintradingis,themoreIusetimestops,soI’mmuchmorelikelytouseatimestoponadaytradethanIwillaswingtrade.AsIwidenmytimehorizon,Itendtosticktopricestops.

S9-18:Howdoyouhandlepositionsheadingintotheirearnings?Doyouholdthestockthroughearnings,reduceyourposition,selloutright,orholdonandifitgapsbelowyourstop,justsellASAP?Minervini: Sometimes I hold, and sometimes I don’t. It’s not an exactscience.IfIdon’thaveaprofitcushion,Iwilloftenreducemyshares,especiallyif the position is oversized; I never hold a large position into earnings. If thestockbreaksdownonapoor report, I almost always sell immediately. Idon’tcareiflateritcomesbackand,inhindsight,itturnsoutIwaswrongtosell.Atthatmoment, I’malreadywrong, and I’mnot interested inprotectingmyego;myonlyconcernistoprotectmyportfoliofromadditionalloss.Youcoulduseoptionstolimityourriskorhedgetheposition,notsomethingIgenerallydo.Myruleistoneverholdalargepositiongoingintoanimportantevent,likeearnings.Ryan:IfIdon’townit,Iwon’tbuyitbeforeearnings.IfIhaveaniceprofit,Iwillprobablyreducethesizeoftheposition.SometimesImightevenbuysomeputsasprotectionbutnottoooften.Ifitgapsdownbelowmystop,Iwillseeifthereisanyrallyinthefirst30minutes.Ifitgoesbelowthelowofthefirst30minutes,itwillbegone.Iwill hold through earnings if I have a profit cushion alreadybuilt into the

stock.Ialsohavetoknowalotmoreaboutthecompany’sfundamentalsbeforethe report. Inever like to takeanewposition ina stock rightbeforeearnings.Sometimes I reduce the size of the position, especially if the stock has beenrunning up into earnings. The run-up might suggest that expectations for thecompanytobeatitsearningsestimatesaretoohigh.Zanger:AsInotedabove,Ineverholdthroughearnings.Isellallpositionsthedaybeforeearningsandthenreconsiderthestockshoulditmoveupongoodearnings news and strong forward guidance. This is predicated on the stockcoming out of awell-formed base on its chart.While Imaymiss some greatmoverstotheupsiderightattheonset,thereisnothingsweeterthanavoidingthestockthatjustgappeddown$20to$80onanearningsmiss.Theriskofholdingthrough earnings and livingwith the financial and emotional damage is rarelyjustifiedbytheoccasionalgains.Infact,Isellafulldaybeforeearningsjustincaseearningsarereleasedearlybymistake.RitchieII:Ineverholdalargepositionorholdaloser.IhaveachecklistofsortsthatIrunthrough,butthemostimportantthingIwantistonothavealargepositionandthentoseethatI’mataprofitinthetradealready;ifIdon’thaveaprofit, I almostneverhold,unless thepositionat thatpoint isvery small. If itgapswellbelowmystop,Iusuallyjustsell;ifitgapsclosetoakeyareaorjustbelow it, I maywait a little bit to see if it gets any support, but usually I’mlookingthentosellintoanybounceIget.

S9-19:Doyousellexistingpositionsifyouarefullyinvestedandanewstocksetsup?Ifyes,whichonesdoyousellfirst—theoneswiththehighestgainsortheweakestperformers?Minervini: Imay sell an extended stock tobuya freshnewbreakout.Butyouhavetobecarefulnottoselloutstrongstocksjustbecausetheyareshort-termextended;oftenthestrongeststocksaretheonesthatgoevenmuchhigher.Most of the time—in the strongest names—Iwill hold some shares to play alargermove. If Ihave losses, Iwillusually sellmy losers first. If theyhitmy

stops,thenIhavefreshcashautomatically.Ryan:Theweaker performers are always the first to go.You have to havesome patience and give a stock time to make a move. If it continues to gosidewayswhile the rest of themarket is in an uptrend, eventually its relativestrength against all the other stocks in themarket is going to fall off, and thestockshouldbe sold.Youwant theequity inyourportfolioalways rotating tothestocksthatarestartingtomovehigher.Zanger:TherearetimeswhenImightreduceastockthathashadanicerunandisnowextended.OrImightcutcompletelyoutofalaggardandthentryanewly identified stockand seehow it runs.Obviously theweakest-performingstockwouldbemyfirstchoicetocut.RitchieII:Iwilldothissometimes,butonlyifIdeterminethesituationI’mgetting into is better than the situation I’m already in. So in that sense, Iwillnever sell awinner tobuyanewposition.That’s illogical tome,because I’mtradingoutoflessrisktobuymore,asanewpositionhasthefullriskpremiumattachedtoitversusapositionthatIalreadyownthatisworkingforme.NowImaysellapositionthatisonlyupfractionallyorhasn’treallyfollowedthrough;butIwilloftenhaveaplantorepurchasethatpositionifitcanrecoverandbreakbackoutagain.

S9-20:Howdoyoumanagebigwinningpositionsthatrunup20%ormoreinjustafewdaysorafewweeks?Minervini:Ifthestockisreallystrong,Itrytogiveitextratime.Imaysellaportionandthenholdtherest.LikeIsaidpreviously,youhavetobecarefulnotto sell out really strong stocks just because they are short-term extended—especially in thebeginningofanewbullmarket, thestrongeststockscouldbemarketleadersabouttoembarkonamajoradvance.Ryan: Icontinue tohold them.Stocks thatdemonstrate thatkindofstrengthareusuallytheleaders,andyouwanttotrytogetalong-termmoveoutofthem.Zanger:ReducingintostrengthisusuallyhowImanageit.Thebigproblem

formanynewtradersis that theybelievethisonestockisgoingtomakethemrich.Theykeepaddingorholdformuchlongerthantheyshould.Manyoftheseveryfastmoverscanbeexhaustionmovesorgaps.Inanyevent,Ireduceatthe20%profitareatolockingains,andIlettherestride.IholdtothevariousstopstrategiesInotedabove,suchasthe21-daysimplemovingaverageline.RitchieII:Bydefinition,thesearepositionsIwouldprobablywanttoholdfor a bigger move, but generally I would still scale out of a portion of theposition into a run like that, which puts you in a really strong positionpsychologicallybecauseyou’vetakenareallyniceprofitonapiece;soifitpullsin,you’regladyoutooksome,andifitralliessignificantlyfurther,thenyou’regladthatyou’restillholdingtheremainingpiece.

S9-21:Howdoyoumanagethesuccessfultrades?Whattypesofsellsignalsdoyouuse?Minervini:Therearemanythingstolookforthatcouldindicateit’stimetostepasidefromawinningtrade.Themainthingtorealizeisthatyou’revirtuallynevergoingtogetthehighprice.Nailinghighsandlowsisnotwhatsuccessfultradingisabout.Thegoalistosellhigherthanwhereyoubought.Thegoalistomakemoremoneythanyouriskandtodoitrepeatedly.Oncemypositionturnsintoadecentprofit,Iwilloftenmovemystoptothe

breakeven at that point. I’m generally looking to sell into strength while thestockisadvancing.Idon’t liketrailingstops,butIoftenwillseta“backstop.”That’sastopthatprotectsacertainportionofmygainandthenallowsthestockto tradeas longas itholdsabove that level. If thestockmovesupmuch fromthere,thenImayeithersellitorraisethebackstop.Asthestockgoeshigher,Iget tighter and tighterwithmybackstop, eventually chokingoff the trade andnailingdownmyprofit.Ryan:OnceIhaveanicegainanditlookslikeIaminaleadingstock,Igiveitroomtomove.The8%stoplossisusedonlyattheinitialpurchaseprice.Afterthat,Imovemystoplosstothebreakeven.Asthestockmoveshigher,Ithenuse

movingaverages,trendlines,andareasofconsolidationtogivemespotswhereIshouldprotectmyprofits.If the stock hasmade a bigmove, I look for a change in how the stock is

acting. Is the stock dropping on increased volume and rallying on lightervolume?Hasitbrokendownfromthelastbaseitwasin?Diditbreakbelowits50-dayor200-daymovingaverageorarecentuptrendline?MostofthechangeIamlookingforistechnicalinnature,andIfocusonthestock’sbehavior.Zanger:Managingthesuccessfultradesmeansyouletthemrununtilyougettoasellsignal,suchasabreakofaverysteeprisingtrendlineonvolume,orabreak of a 21-dayMA line, or a break of a 50-dayMA line.My preferencewouldbethebreakofa21-dayMAlineoraverysteepelevatedtrendline.Ritchie II: I don’t have a sell signal per se. The first andmost importantthingiswherethestockisrelativetohowmuchIoriginallysetouttorisk.IfI’matamultipleofmyrisk,thenI’mlookingforpossiblesignstotakeprofits:Doesithaveareallylargeupdayorareversal?ThosearethingsIlookatsometimes.I’llalsolookathowfarit’sextendedfromacertainmovingaverage.Orifit’sacceleratingaboveornearthetopofitsownuptrend,thatisoftenasigntotakesomeoff.Iwillneversellastock intostrength that isn’tat least twiceasmuchasmy

original risk amount; that’s based onmy longer-term tradingmetrics. Once astockispastthatpoint,Iusealistofthingstodeterminewhethertotakepartorallof theprofits.This list includeshowgoodIperceive thepriceactiontobe,howwellmyoveralltradingisgoing,andhowstrongtheearningsandsalesare,aswellaswhatgroupthestockisin.

SECTIONTEN

Psychology

S10-1:Howdoyoumaintaindisciplineandfighttheurgetoovertrade?Whendoyoujustsitonyourhands?Minervini: I fight theurgeby letting the stocksandmycriteriaguideme.The urge to trade is not part ofmy trading plan. I won’t trade unless certaincriteria aremet.As a result,when stocks set up according tomy discipline, Itrade.When theydon’t, I sit out. It’s that simple, but only if you candivorceyourselffromyouropinionandletthemarketguideyou.Ryan:Idon’tliketolosecapital,andwhenIstarttohaveanumberoflossesinarow,Ijusttradesmallerandsmaller.Therearetimeswhenyoushouldhavenoexposure to themarket fromthe longside,withineitherabearmarketorasidewaysmarket.Zanger:Observe and live in the firestorm of the market for a few dozenyears,andyou’ll learnnot tostickyourhandin thefirewhenyousee it. Igotburnedtoomanytimestoforgetwhat“chopandslop”trulymeans,whetherlongor short. Market behavior follows distinct repetitive patterns that teach clearlessons, so when you see a market starting to act badly, you’ve learnedinstinctivelythatit’stimetobackofffortherequiredweeksormonths.Duringthat timeyoudon’tgoonvacationandturnyourbackonthemarket;youstillneed tobewatching themarket everyday soyou’llknowwhen ithascalmeddownandisbacktonormal.Diligenceevenduringachoppymarket ispartofgoodtiming.RitchieII:Thisisoneofthehardestthings,especiallywhenyoustartoutifyouaretryingtomakealiving,becausetheneedtoeatcanbeverypowerfulinforcingyoutotrade.Theeasiestsolutionistocloselywatchyourrecenttradingresults and to quickly adjust the frequencyof your trading in accordancewith

howyou’re doing.When things are goingwell, keep taking trades; andwhenthingsarenotgoingwell,bemoreselective.

S10-2:Whatadvicecanyougivetohelpatraderavoidanalysisparalysisandhelphimorhertakedecisiveaction?Minervini:Ifyou’renervousandfindingitdifficult to takeactionandpullthetrigger,tradesmall;tradeassmallasyouneedtountilyoufeelcomfortable.Overtimeyouwillgainconfidence,butonlyifyoucutyourlossesandavoidbigdrawdowns.Biglosseswillhurtyourbankaccountaswellasyourconfidence,andthatwillmakeyouevenmoreapprehensive.Ryan:Youshouldhaveamethodthatnarrowsdowntoaprecisesetofrules.If a stockmeets all the criteria you set down, then you gowith it; if not, donothing.Zanger:Ithinktherearetwopartstothat“analysisparalysis”questionasfarasmarket trading is concerned.First is justbeingable topull the triggeronatrade.The second and equally important is allowing your analysis to paralyzeyou while in a trade that you should exit, just because of the emotionalcommitmenttotheanalysis.On the first, if you are trappedoveranalyzingwhether to enter a trade, then

you aremore than likely afraidof failure.Trade small positions; useputs andcalls; do whatever it takes to get some real cash on the line at modest risk.Confidencebuildsfromsuccess,nomatterhowsmall.Onthesecondcircumstance,tradersoftengetfrozenthinkingtheirstockistoo

great to break down or go into a deep correction. They hold steadfast to thebelieftheirstockisinanuptrend,andwhenitdoesplungeinaclearlyunhealthymanner, they refuse to take action before it plunges further. Or if their stockbreaksahigh-levelmovingaveragesuchas the10-day, theyholdfirmto theirfaith. The answer to this paralysis is simple: set your line in the sand beforeenteringthetradeandmakesureyousticktoit.RitchieII:Ithinkeverytraderatsomepointhastohaveasetofconditions

that are “no-brainers”where the trader always takes at least a small position.You make a trading plan that requires you to take a trade when x, y, and zcriteriaaremet.Then,iftheno-brainertradeorsituationisyieldinggoodresults,youbuildonthatbyeithertakingmoresimilartradesorlookingtopyramidtotheexistingposition.

S10-3:Howdoyoubuildtheconfidenceittakestopullthetriggeronlargepositions?Minervini:Again, start small. Over time you will gain the confidence totrade larger. Having low confidence in the beginning isn’t necessarily a badthing.Ifyou’reoverconfident,youmaydosomethingveryriskyand then loseallyourconfidencefromtakinglargelosses.It’sbettertostartouthumbleandbuildyourconfidenceonetradeatatime.Ryan:Successalwayshelpsbuildconfidence.Ifyouhavebeenpickingsomegood stocks consistentlywith small positions, then you should gradually startyourinitialpurchasewithalargeramount.Soifyouhavebeendoingwellwith5%positions,thenstartyourpositionsat7–8%.Ionlywantapositiontogettobe 15–25%ofmy portfolio because ofmarket appreciation or because I haveaddedtothepositionasithasbuiltsubsequentbases.Zanger:Years of seeing what works and what doesn’t. You learn to readearnings properly and identify stocks that dominate their space. Combine thatwith an eye for chart patterns and solid bases along with the overall marketbehavior,andyouwillhaveplentyofconfidenceforthebigtrades.RitchieII:Success.Thisiswherehavingastringofwinnersorevenastringof good market actions gives you the confidence to take bigger-size tradesbecauseyou’ve financed theadditional riskwithyour last fewwinning trades.Mosthomerunhittersdon’tswingforthefences,buttheyoftenfindthathomeruns comewhen they’re just making good solid contact consistently with theball. Stock trading is no different from anything else; you get a little bit ofsuccess,andthatgivesyoutheaddedconfidencetostartswingingalittleharder

—orbiggerinthiscase.

S10-4:Whatdoyoudowhenyouhaveaseriesoflosses;whatadjustmentsdoyoumaketoyourtrading?Minervini: I tradesmaller.Themore I lose, thesmaller I trade. If I takeaseriesoflossesinarow,itusuallymeansgeneralmarketconditionsaren’tright.Ryan: I tradesmallerandsmaller. I slowdownand trynot toquicklymakebacktheequityIjustlostinonetrade.AttimesImightevenstopforanumberof days or weeks and take a break. I go over my rules and reviewwhat hasworked in thepast. I alsodosomeself-examination to see if I canbe focusedenoughtosucceedatthattime.Youcouldbegoingthroughsomeeventsinyourlifewhereyoushouldstoptradinguntilyoucanclearlyfocusagain.Zanger:IfIhaveaseriesoflosses,thenthemarketismisbehaving,andit’stimetostandbackandwaitforthemarkettostartbehavingproperlyagain.Thiscouldbeafewweekstoafewmonthsorlonger.Afewyearswouldnotevenbeoutofthequestion,aswasthecasefromMarch2000toMarch2003whentheNasdaqlost80%ofitsvalue.RitchieII:IfIhavenogainstospeakofordon’thaveanyopengains,thenIwillstartreducingriskbytakingeitherfewertradesorsmallersize.IfIbuyfourstocksandIgetstoppedoutoftwoofthem,buttheothertwoarepayingforthelosses, then I stay thecourse,although Imay temper thenext fewbuys to seewherethingsshakeout.

S10-5:Youseemtobeusingthesamestrategyformanyyears—howhaveyouavoidedstyledrift?Minervini: Commitment. You have to commit to a strategy. Yourrelationshipwithyourstockstrategyislikeamarriage;howgoodamarriagedoyou think youwould have if you cheated on your spouse andweren’t totallycommitted?Findasystemthatmakessensetoyou—somethingthatyoubelievein—andcommittoit.Understandthatsuccessisnotgoingtohappenovernight.Ittakestime,andittakescommitment.

Ryan:Ihavetriedotherapproaches,butIhaven’tfoundoneyetthatdoesaswell as a growth stock approach. Not that there aren’t other approaches orstrategiesthatdowell,butthisseemstosuitmypersonalitythebest.Zanger:You have to adjust to current market conditions, but momentumtrading really doesn’t change. It’s the difference between strategy and tactics.Mytacticschange,butmystrategydoesn’t.Onealwayshastoadjusttothecurrentmarketbehaviordespitetheinvariant

outcomeofthemarket,whichistoserveupallthesamechartpatternsoverandoveragain.Some tactical changesa tradermustaddress inadapting tocurrentmarket conditions are reflected in the questions, Is themarket simply driftinghigher, or is it roaring higher? Is it a sluggish market, and do breakoutscommonly fail?Andoneof themost important tacticalvariationsof all isnotbeing onmargin or in optionswhen themarket goes into a correction. I’m amomentumtraderwhoadaptshisstyletowhatthemarketthrowsathim.RitchieII:Thisquestiondoesn’tapplytomeasmuch,asI’vealwaystakensomewhatofamultistrategyapproachwhereItradeaportfolioofequitiesonashorter-term time frame, namely from two days to two months. Within theportfolio,Iwillusetheexcesscash(myaveragepercentageinvestedperdayisverylow)todosomeshorter-termtradinginveryliquidfutures.

S10-6:Arethereevertimesthatyoudeviatefromyourdiscipline?Whatcausedyoutoloseyourfocus?Howdidyougetbackontrack?Minervini: I’m human and certainly not perfect, so yes.However, if I dodeviate,it’snotbymuch,andIgetbackontrackprettyquickly.Itwasn’talwaysthat way.When I first started trading, I deviated all the time. Of course, theconsistency ofmy resultswas in linewith the consistency ofmy discipline. Ifinally tooka realhard lookatwhat Iwasdoinganddecidedonceand forallthat I would stick to a plan and learn from my mistakes, analyzing them socloselyandunderstandingthemsointimatelythatIwouldnotre-createthem.Lotsof thingscantemptyoutolosefocus.That’swhyit’ssoimportant that

youhavea setof rulesandaplan toguideyou.Thisway,whenyou’re facedwithatoughdecision,youwon’thavemuchtothinkabout;youjustfollowyourplan.I’mflexiblewithmyobservationsbutnotwithmyphilosophy.Techniquesandtacticsevolve,butfundamentaltruthsremainconstant.Ryan: I have tried quite a few other approaches. For instance, I have triedbuying turnaround situations, buying on pullbacks, buying on Fibonacciretracements,andanumberofotherstrategies.Ihaveneverreallydeviatedfromthebasichigh-growthstockapproachI’veusedsinceworkingatWilliamO’Neil&Co.,butIhavetriedtoincorporatesomeofthesestrategiesintoaportionofmyportfolio.IhavealwaysfoundthatIwouldhavethegreatestsuccesswhenIwouldbuycompanieswithacceleratingearningsbreakingouttonewhighs.Itiswhatworkedinthepastandwhatwillcontinuetoworkintothefuture.Zanger:Ithinkmostchart-readingmomentumtraderswilldeviatefromtheirmasterplanatsomepointandtrynewthings.Ifyouassumethelearningprocessnever ends in the trading game, then this is no surprise. Personally, I thinkboredomhasbeenattherootofmanyofmytradingmistakes.Thisbegetsthelargerquestion,whendoeshealthyexperimentationapartfrom

one’stradingdisciplinecrossthelinetosomethingelse?It’seasytogetcaughtup in your own thoughts and perceptions, divorced from reality. Well, themarket has a quick cure; it knocks you out cold on the canvas and puts thesmellingsaltsrightunderyournose.I’mkiddingabit,butthereisnothingbetterthangettingsmackedonafewtradestobringyoubacktorealityandthecrystalclarityofwhatishappeningwithyouandthemarket.RitchieII: I never deviate fromdisciplinewhen it comes to taking losses,whichisautomatic.Forme,todeviateismoreintakingtradesthatarewiderandlooser,meaning using criteria thatmight not be as solid as they should be ortradingsomethingthatisabitoutsidemyareaofcompetence.Forme,thistendstohappenintwovarieties:EitherI’monareallygoodstreakandfeelinglikeIcandonowrong,so I start shootingat things Iordinarilywouldn’t.Or Ihave

nothing that meets my strictest of criteria, so I start forcing a trade here andthere.IgetbackontrackusuallybylosingandthenbeingforcedtorefocusonwhatIdobest.

S10-7:Wouldyouprefertohaveonlyafewbigwinnersevenifitmeanshavingmanymoresmalllosers;orisitmoreimportanttohavemanywinnerstokeepyourmindsetpositive?Minervini:I liketobuild infailureandtrytokeepmyapproachprofitableeven at a low percentage of profitable trades or low batting average. Iwouldrathertakemoresmalllosses.Iprefertocontrolmyedgethroughmanagingthelossesinrelationtomygainsasopposedtotryingtocontrol thepercentageofprofitabletrades,whichyouhavenodirectcontrolover.Ryan:No.Ihavealwayssaidthatifyouhavetwoorthreereallygoodstocksayear,itmakesupforallthesmalllossesandmuchmore.Zanger:Mybiggestgainshavecomefromjustafewdozenmassivemoversoverthepast20years.Everythingelseisstatisticallyinsignificantifyouweighthis purely on a profit basis. I would add, though, that I routinely havemorelosersinayearthanwinnerssinceI test thewaterall thetimewithverysmallpositions. These tests are actually necessary to help me avoid boredom inbetweenbigmoves.Andadmittedly,testingthewatershashelpedmefindafewof thosebetter-movingstocksaswell. Itgoeswithout saying,ofcourse, that Ikeepvery tight stopson those stocks that fail tomoveupor thatundercut thepivotarea.RitchieII:IdeallyIwouldliketohavelotsofsmallergainssoIcanturntheedgeoverfaster;however,asmysizegrows,itdoesbecomemorechallenging.So I’malways looking for select situationswhere I can rideabiggermoveaswell.

S10-8:Howdoyouknowwhenyourstrategymaybebrokenversusjustbeingoutoffavorwiththecurrentmarket?Minervini: I’musing timeless principles that shouldnever bepermanently

brokenunlessthelawofsupplyanddemandsuddenlydoesn’tapply.Thatwouldbelikethelawofgravitychanging.Notverylikely.Therearecertainlyperiodswhen trading ischallenging regardlessofwhichstrategyyouuse,andat somepointeverystrategyunderperforms.Duringthoseperiods,Ifocusonnotlosingmuchandreadyingmyselfforwhenthestrategygetsbackinfavor.Ryan:My strategy has never been broken. It is what works in the stockmarket. There are times when value may be in favor and outperform growthstocks, but that doesn’t mean my strategy is broken. Eventually, the marketalwayscomesbacktowheretheearningsaregrowing.Zanger:When stocks continually fail their breakouts, I know momentumtrading won’t work for me. A market correction or sloppy behavior hasobviouslystarted,so it’s timetostepasideforafewmonthsormoreandwaitforatrend.Ritchie II: Answering this dilemma is often the difference betweenweatheringadrawdownand throwing in the towel.Theway Ihavehandled itthus far is by trying to have a realistic understanding ofmy trading and howprobability theorycanadverselyaffectme.So if Ihaveasetof tradingresultsoveragivenperiodthatI’mconfidentarestatisticallyrelevant,thenIcanrunaseries of simulations to see what my worst projected drawdowns couldpotentiallybeatagivenmathematicaledge.IfIexperienceadrawdownworsethanprobabilitytheorysaysispossibleorwayoutsideofstatisticalnorms,thenit would tell me my initial assumption on the strength of my edge is highlysuspect.Thiscangetcomplicated,buttherealpointhereisthatnoonegivesupatnew

equityhighs,soyouhavetohaverealisticassumptionsforwhatdrawdownsarenormal versus the ones that are telling you something is wrong in the biggerpicturewitheitheryouoryourapproach.

S10-9:Eachofyouexperiencedlossesbeforeeverythingcametogetherandyoubecameprofitable.Whatwasyourmindsettostaysopositiveor

havesuchastrongbeliefthatyourmethodwouldeventuallywork,especiallybackinthedaywhentherewasn’tasmuchabilitytolearnfromotherstoseethatthereisawaytobeatthemarkets?Minervini:That’spreciselywhymyapproachisbasedontimelesstruths.Iremoveoneoftheimportantquestionmarks,orwhatIcallthe“strategyfactor.”This narrows it down to the most important variable, me. I always tookresponsibility for my results and never blamed outside factors. If you can beobjectiveandlearnfromyourmistakes,eventuallyyouwillacquirethecorrectknowledge.Thenit’samatterofbeingdisciplined.But you have to believe in your own ability, and you must make a

commitment. Forget about the clock. Becoming great at anything worthwhiletakestime,andthatamountoftimediffersfrompersontoperson.Ifyoudon’tgetthehangofit inoneyear, thengiveit twoyears;andifyoudon’tget it intwoyears,giveitthree,andsoon.Whenyousetadeadlineandsay,“IfIdon’tgetitbyXamountoftime,”you’vealreadysealedyourfate.Liferewardsthosewhomakeanunconditionalcommitment.Bottomline:Therearemanywaystoskinthemarket.Butultimately,it’snotthegun;it’sthegunner.Ryan:IwasfortunatetowatchBillO’Neilandhowheoperatedinthemarket,andsoIhadanexampleofsuccess.WhenIexperiencedlosses,IknewthatwithalotofhardworktofigureoutwhereIwasmakingmymistakes,Icouldturnmy performance around. Once I corrected my mistakes, I became extremelyfocusedonbuyingonlyonetypeofsetup.Ididn’tcareaboutanyothermethodorsetup.Thatiswhenmyreturnsjusttookoff.Zanger:Iwassotiredofworking80to90hoursaweekbuildingswimmingpools for thewealthy inBeverlyHills andnotmakingmore than$60,000peryear.Ialwaysknewthebigmoneywastobemadeinstocksorrealestate,andIwasgoingtogetoutofbuildingpoolsifitwasthelastthingIdid.Ioptedforthestockmarket.IassumedIcouldstartwithaslittleas15grand,andifIwentonmargin,Iwouldhave$30,000asmystartingbasetotrade.IfIcoulddoublethatinsixmonths,Iwouldhave$60,000;thenifIcoulddoubleitagaininanother

six months, I would have $120,000, and so on. The overly optimistic mathpresentedaclearpathoutofthepool-buildingbusinessbecauseIwasgoingtogetoutnomatterwhatittook.I got my first view of chart patterns and their power watching a show on

KWHY-TV on UHF channel 22 in the late 1970s and early 1980s. A fellownamedGeneMorgan came on 30minutes after themarket closewith a showcalledChartingtheMarket.HeusedaneaselandXeroxedcopiesofchartsfromthebookknownthenasDailyGraphs.Hewouldput theXeroxeson theeaseland mark up chart patterns, explaining how they foretold the future pricemovementofstocks.Heusedtoshowhistoricalchartswithflagsandpennants,cupsandhandles,andparaboliccurves.I thought thesewerewild concepts, and I started going to some of his free

seminars. Unfortunately, all he wanted to do was sell interests in oil and gasventures. So, on my own, I started going down to the offices where DailyGraphswasprintedinLosAngelesandbuyingtheprintedbookseverySaturdaymorning.Ispentallmyfreetimelookingatcloseto2,000stocksinthesebooks,tryingtodiscernthechartpatternsthatGeneshowedonTV.Icouldnotfindasingle chart pattern ifmy life depended on it.Of course,what I realizedwasunlesssomeonepointedthemoutforme,Icouldnotinterpretthechartpatternsproperly.Ihadn’tspentnearlyenoughtimeonchartpatternrecognition.DailyGraphsrecommendedabookcalledHowtoMakeMoneyinStocksby

WilliamO’Neil alongwithEncyclopedia of Chart Patterns. I jumped inwithboth feet and broadened my reading to include Jesse Livermore’s bookReminiscencesofaStockOperator.Thingsstartedtogelforme.It tookafewyearsofreadingthesebooksrepeatedlyandapplyingwhatIwasseeingonmyAIQchartingprogramtoreal-timetradingduringthedaybeforeIgotthehangofit.RitchieII:Icertainlydidn’thaveconfidenceinitiallythatwhatIwasdoingwasgoingtowork.Infact,someofwhatIwasdoingwasn’tworking,butIdid

have confidence that if I managed risk and compounded upon ideas that didwork,Iwouldhaveachanceatmakingit.MyfirstyearIhardlymadeanything.Ididhaveonestrategythatreturnedalargeamountinmyportfolio,butithadthesmallestallocation,soIknewifIjustallocatedmoretowhatwasworking,Iwouldhavedonebetter.Sowhilethebottomlinehadn’tgrownmassively,Ifeltmy knowledge and experience had, such that to quit at that pointwould haveseemedmorefoolishthantocontinue.

S10-10:Doyouconductpost-analysis?Ifyes,canyouexplaintheprocessandhowyouusethatinformationtoimproveyourtrading?Minervini:Yes,I’mabigfanofpost-analysis; it’swhat turnedmytradingaround early inmy career. I even created a software tool that I use, and alsoprovide to our Private Access members, to measure trading results, whichincludes a unique proprietary distribution curve. In addition, I conduct a verystraightforwardevaluation,which is tosimplymarkonachartwhere Iboughtand sold and then study the results looking for common denominators. Thisbasicanalysiscanbearealeye-opener.Thekeyis todevelopafeedbackloopandstayintouchwithyourtradingresultsregularly.Thenit’samatteroflettingwhatyou’velearnedmakeitswaybackintoyourtrading.Ryan:When I buy a stock, either I print out the chart with the statisticalinformationthatismostimportant,orItakeascreenshotoftheinformationandputit inafiletoreviewitafterIsell thestock.IalsomakenotesaboutwhyIboughtthestockandwhattheconditionofthecurrentmarketenvironmentwas.Fromthoseactualpurchasesandsales,IthenstudywhereIwasrightandwhereI mademistakes. You can learnmore from studying your own investing andtradingpatternsthanjustaboutanythingelse.Zanger: I do conduct post-analysis every now and then, but when I wasstartingout,Iusedtocarryaroundayellowpadofpaperandwritedownallmymistakes.That’sultimatelyhowIcreatedmy10GoldenRulesandTradingTipsthatIhaveonmywebsite,andIstillusethemtoday.

RitchieII:TrackingmytradesissomethingIalwaysdo.EverytradeImakegetstrackedwithinitsappropriatestrategy,soIhaveaccuratetradingmetricsforeverything I’m doing. Then I can make better assumptions about possibledrawdownswithinagivenapproachormyoverallportfolio.I’mamazedatthenumber of peoplewho fail to do this. I’mnot saying it’s essential in order tosucceed,butitisforme.Ibelievethatifstrugglingtradersspentasmuchtimestudyingtheirtradesas

they did their charts, then they would be way better off. Your actual tradingresults have a wealth of information about you even if your trading isunprofitable.Most losing traders don’t do it because it’s painful to look theirpoorresultsintheeye.Thebestthingtodoisstudyyourresultsforpatternsofwhatyoudowellandwhereyoustruggle.Ifyoucanfindsomeobviousareastoimprove, then you can increase or decrease your exposure accordingly.However, if you don’t track your trades, then you will never know the truthaboutyourtradingoryourselfasatrader.

SECTIONELEVEN

FinalThoughts

S11-1:Whatwereyourhardestobstaclestoovercometobecomeasuccessfultrader?Minervini: In the beginning, the hardest thing was to maintain disciplinereligiously; which meant to stop having “just-this-one-time” moments. Youknow,whenthestockchartsayssell,sell,sell!butyousay“justthisonetime”I’mgoingtoholdonandgiveitsomeextraroom.Earlyoninmycareer,Iwouldcutmylossesmostofthetime,buteverynow

andthenIwouldholdonfordearlife,andthosefewlargelosseswouldwreakhavoc.Ialsohadtolearntopracticepatience.Thefearofmissingoutisastrongemotionwhen trading. It is the rootofmany trading failures. Ihave twomainrules:(1)noforcedtrades.(2)nobiglosses.Youmustdevelop“sit-outpower,”theabilitytowaitforcorrectsetupsandnotforceactionandtakesubpartrades.Thenit’samatterofdevelopingthedisciplinetocutyourlossesquicklyinthosesituationsthatdon’tworkoutasyouexpected.Ryan:Adaptinganewwayof thinking is thehardestobstacle toovercome.Youhavetobeabletoadmitmistakesandcorrectthosemistakes.Thatisverytough because that takes self-examination, analyzing what you have doneincorrectlyinthepast.Mostpeoplejustdon’twanttodothat.WhenIlookedatmistakesIwascommittingearlyoninmycareer,IfoundthatIwasbuyingtoomanystocksthatwereextendedfromtheirbreakoutpoint.OnceIcorrectedthatmistake,myperformancetookoff.Ialsohadtogetusedtobuyingstockshittingnewhighs.Atfirst,thatwasveryscarytodo,butasIgotusedtoit,itbecameverynatural.Zanger:Learningtoproperlyreadchartswasthegreatestobstaclebyfar,andnotappreciatingorrespectingthepowerofasteepmarketcorrection,aswellas

amarketbreakwhenonmargin.RitchieII:Thehardestobstacleintradingisgetting“overthehump.”Thistome iswhenyouhaveamethodology thatworks in themarketandworkswithyou to theextent thatyoucanmakeenough towhereyoudon’t feelpressuredintotradesorcircumstancesbecauseyou“haveto”makealiving.Thepressuretoprovidecanbethemostmotivatingyetdisastrousthingifyoudon’tmanagetheconflictproperly.Thisissomethingthatisrarelytalkedaboutinmanyoftheglorystoriesoftraderswho’vemadetheirownfortunes.Butmyguessisthatallofthemhadtodealwiththisconflictiftradingwastheironlysourceofrevenue,whethertheyrealizeditornot.

S11-2:Whathelpedyougetthroughyourlearningcurvethemost:trialanderror,tradingbooks,amentor,orsomethingelse?Minervini:Allof theabove.Mostly,analyzingmypast tradesandgaininganunderstandingofwhatIwasdoingwrongoverandoveragain.OnceIfoundthe common denominators, then it was just a matter of building up thoseweaknessestostrengths.Ryan:Mostofitwasmyowntrialanderror.OnlyIknewexactlywhatIwasthinking at the time of a trade, and only I could really examine where mymistakesweremade.Youcangetsomeguidancefromamoresuccessfultraderand learn from tradingbooks,but in theend,youhave to internalize the rulesthatworkforyouinthemarket.Zanger: It would have to be a combination of several books andmyAIQchartingprogram.HowtoMakeMoneyinStockshastobeatthetopofmylist,withReminiscences of a Stock Operator being up there too. These are must-readsforalltradersandinvestors.RitchieII:Iwouldsaythatalloftheabovehelpedmegreatly.Iwouldsumupmyinfluencesinthefollowingorder:faith,people,andpractice.Faith: Iamaprettyunapologetic followerofJesus. Ifyou’reasking,“What

theheckdoesthishavetodowithtrading?,”formeithaseverythingtodowith

trading, becausemy identity is not inwhat I doorwhat I excel at, but inmyfaith.Thisgivesmea tremendousamountof freedom to fail,which I think iscentraltoanyamountofsuccessImayachieve.Inaddition,it’stoughtofailifI’m truly doing what I feel called to do with whatever gifts and talents I’vereceived, as they’re ultimately not for my own glorification. There’s still atensionhere,asIwanttobeabletoleavetradingsomedayifIfeelledtodosowithout second thoughts to pursue other endeavors, as Iwant to be a slave tonothingbutHiswillforme.People:Iwouldbenowhereintermsofskillorwisdomwithouttheinfluences

of some key people. First and foremost would be my father, Mark Ritchie(“Markthegreater,”ashe’sknowninsmallercircles).Hegavememyfirstbitofcapitaltotradeandtheconfidencetostickwithitinadditiontosomanyotherthings that I can’tmentionbriefly, but he shouldgetmostof the credit.MarkMinervini,themanhimselfandhiswork,hasgreatlyinfluencedagooddealofmystocktrading,andPeterBrandthasgreatlyhelpedmebetterunderstandthegutsofstatisticsasitappliestotradingandspecificallyweatheringdrawdowns.Lastly I’ve been blessed with an incredible wife who has been massivelysupportiveevenwhenwehadnomoney,aswellasincrediblefriendsandfamilywhoaretoomanytomention.Practice:Successfultradingisaresultofpractice.Youlearnhowandwhatto

practicebystudying—studyingthemarketsthemselves,yourtradingresults,andotherswho’vebeensuccessful,aswellasstudyingandpursuinghowtoimproveyourself. My recommended reading list would be tough, but in regard to themarketsspecificallyI’dsay:• ReminiscencesofaStockOperatorbyEdwinLefèvre• TradeLikeaStockMarketWizardbyMarkMinervini• HowtoTradeinStocksbyJesseLivermore• HowtoMakeMoneyinStocksbyWilliamO’Neil• AnythingandeverythingbyJackSchwager• PitBullbyMartySchwartz

For personal improvement in regard to faith or psychology or for anyonewanting to take awalkon thewild sideofwhat I hope to shapemy soul andcharacter,I’drecommend:• TheNewTestament• OikonomicsbyMikeBreenandBenSternke• MyUtmostforHisHighestbyOswaldChambers• SearchingforGodKnowsWhatbyDonaldMiller

S11-3:Howimportantdoyouthinkitistohaveamentorinordertobecomesuccessful?Minervini: If your mentor is good, it can be extremely important and apathway to learning the skills you need. It can shorten the learning curve andteachyouthingsthatyoumayneverhavelearnedonyourown.Butremember,practiceonlymakesperfectifyou’repracticingtherightthings.Sochoosewhoteachesyoucarefully.Amentorshouldhavealreadyaccomplishedwhatyou’retrying to attain. I never could understand how someone could think he or shecould learn how tomake amillion dollars from someonewho never earned amilliondollars.Ievenknowafinancialplannerwhopreviouslywentbankrupt!Howabsurdisthat?Ryan:Having amentor could help save some time in focusing on the rightthings to look for,butyoucanalsodo itonyourown. Itmightbeharderandtake longer, but it can be done alone through self-examination and throughbooksorseminarsfromsuccessfulinvestors.Zanger:That reallydependson thementor.Mostofwhat I seeout there ismoreself-hypethansubstance,andofcoursethiswillleadyouintobankruptcyinnotime.Butifyouareluckyenoughtofindaseasonedmentorwithagreattrackrecord,thatpersonisgoingtocatapultyoutothenextlevelandbeyond.RitchieII: I thinkhavingagoodmentoror evenmentors ispriceless, as Ipreviouslyalludedto.Istronglybelieveintheproverbthat“wisdomisfoundinthecounselofmany,”sothatweshouldn’toftenbecontentwithwhatwethink

we know but always be willing to learn from those more experienced inknowledgeandpracticethanourselves.

S11-4:Whatwasthemostimportant“aha”momentinyourtradingcareer?Minervini:When I finally realized that with correct risk management, Ididn’thavetofindstocksthatdoubledandtripledtoachievetriple-digitreturns.IrealizedthatIcouldtradesmallermovesandstillgethugereturns,andmoreimportantly, I could do it consistently. It’s all about risk versus reward andturnover.That’stheholygrail.Ryan:ThemomentIstudiedthetradesImadefrommyfirstyearandrealizedwhat Iwasdoingwrong.That iswhen I said I amonlygoing tobuy thisonesetupandnotcareaboutanythingelse.Thatiswhenitallstartedtowork.Zanger:That came inOctober1997when Iwas readinganoil indexchartthat created a key reversal bar one day after a strong summer run in stocks. Inoted this reversalbaroneeveningand thought tomyself thatsince this indexwasleadingthemarket,thisreversalbarmaymeanthatthemarkethastopped.Sureasthesungoesdowneverynight,themarketplungedfromthere,andmypositions got smoked! I will never forget this moment or its results to myportfolio.To this day, I’m still quick to get out of themarketwhen I see potentially

bearishchartsordailybars.AndwhileI’moftenrightandsafeonanearlycall,Icanstillbewrong,thoughthatmemoryhasservedmewellovertheselastfewdecades.Remember,youcanalwaysgetbackin.RitchieII:OneofmybiggestahamomentswaswhenIrealizedthepowerofcompoundingagood ideaorapproach. I realized that itwaspossible to reallygrowmoneyifyoumanagedthedownsideandstuckwithawinningstrategy.

S11-5:Whatareyourtopfivetradingrules?Minervini:1.Thinkriskfirst.Alwaystradewithastoplossandknowwhereyou’regetting

outbeforeyougetin.2.Keeplossessmallandprotectyourbreakevenpointonceyouattainadecentprofit.

3.Neverriskmorethanyouexpecttogain.4.Neveraveragedown.5.Knowthetruthaboutyourtrading—studyyourresultsregularly.Ryan:1.Cutyourlossesandkeepthemsmall.2.Beextremelydisciplined.3.Tradesmallerifyouhaveanumberoflossesinarow.4.Neverletagoodgainturnintoaloss.5.Movemoneyfromyourloserstoyourwinners.Zanger:1.Neverletastockgetbelowwhatyoupaidforit.2.Never chase a stock that is upmore than 3–5%above its pivot or breakoutarea.

3.Avoidoptions.4.Reducepositionsizeafteragoodmoveup.5.Hangontothosewinnersandletgoofthelaggards.RitchieII:1.Alwaystradewithaplan,specificallyonethatevaluatesriskineverypossiblewayforanindividualpositionaswellasyourentireportfolio.

2.Alwaysreducetradingsizeafterabiglossorlosingperiod.3.Shiftcapital to ideasandstrategies thatareworkingandreduceit fromonesthataren’t.

4.Guardyouremotionswithequalvaluetothewayyouguardyourcapital.5.Bringyour“A”gameeveryday.

S11-6:Whydoestheaverageinvestorfailtoachievebigperformance?Minervini:Thefollowingaresomeofthemainreasonstradersfailtoattain

bigperformanceinthestockmarket:• Usepoorselectioncriteria.• Don’tcutlosses—mostcommonmistake.• Addtolosingpositions—thenumberonereasontradersblowup.• Don’t protect profits—they let decent gains turn into losses (very commonmistake).

• Don’tknowthetruthabout their trading—theyfail toconductperiodicpost-analysis.

• Don’tcommittoastrategy—theyexperiencewhatwecallstyledriftandgiveuptoosoon(alsoverycommon).

• Have a breakdown in discipline—even if they have rules, eventually theybreakthem.

Ryan:Either they don’t have the right emotionalmakeup to invest, or theywon’tstudytheirmistakesandcorrectthem.Ifsomeoneemploysagrowthstockstrategy,therearealotofbooksfromgreattraderslikeMarkMinervini,WilliamO’Neil, and others that lay out the right rules for them, but it is the averageinvestor’sresponsibilitytomakeitwork.Zanger:Theaverageinvestorusuallyhasafull-timejobandlikelykidsandmanyotherdistractionsthatconsumehisorhertime.Thisleaveslittletimetodothe homework and chart pattern interpretation required to rise above justaverage.Ritchie II:Average investors certainly don’t understand enough about themarket to begin with to have consistent big performances. Even if they didthough,therewouldbeanevensmallernumberwhohadtheknowledgeaswellas the discipline required to consistently follow through with doing the rightthings.AsmyfathereloquentlypointsoutinhisrecentbookMyTradingBible,knowledgeandtalentaregreat,but“disciplinegetsthejobdone.”

S11-7:Whatadvicewouldyougivetoanewtrader?Minervini:Getagoodrolemodel,someonewhohasalreadyaccomplished

whatyou’reaspiringtodo.Don’tgetdiscouragedifyoudon’tperformwellinthefirstfewyears;ittakestimetolearnhowtotrade.Realizethatyou’regoingto make a huge number of mistakes and that you need to learn from thosemistakes; they are your best teacher. You have to take action and gainexperience. Come upwith a plan and take action. Any plan is better than noplan.Youmustbewillingtoputintheworkandownyourfailures.Thenyoucan

ownyoursuccess.Understandthatthereareno“secrets.”Formosttraders,thebiggest challenge is sticking to a strategy and maintaining discipline. Mosttraderswouldfailevenifyougavethemasuccessfulstrategybecausetheycan’tcommittothelearningcurveandmakeitthroughthedifficulttimes.Theyloseconfidenceinthestrategy,andtheyloseconfidenceintheirownabilities.Ryan:Read all thematerial put out byWilliamO’Neil, Investor’s BusinessDaily,MarketSmith,andMarkMinervini.Studyitandstartinvesting.Evenifitis a few hundred dollars, get started. You will learn a lot with your firstinvestment.Learnfromyourmistakesandcorrectthem.Nevergiveup,andkeeptrying.Withenougheffort,yourreturnscouldmakeatremendousdifferenceinyourfuture.Zanger:Read the books I’ve noted previously. Then start trading lightlywithoutmarginoroptionsuntilyoucanputtogethersolidgainsforsixtoninemonthsandhavelivedthroughamarketcorrectionaswellascanspotamarketorstockreversal.RitchieII:IwouldkeepitverysimpleandtellnewtraderstofocusonwhatI call the “three Ms”: a market, a method, and myself. If you get all threeworkingtogether,you’llbesuccessful.