Trade Like a Stock Market Wizard by Mark Minervini

Chapter 2 : What you need to Know first

During every bull and bear market for the last three decades I have heard the words “It’s different this time.” Surely, during the 1920s, the legendary stock trader Jesse Livermore heard these same words. In How to Trade in Stocks, Livermore said, “All through time, people have basically acted and reacted the same way in the market as a result of: greed, fear, ignorance, and hope. Wall Street never changes, the pockets change, the stocks change, but Wall Street never changes, because human nature never changes.”

“On the basis of 30 years of personal experience and historical analysis of every market cycle going back to the early 1900s, I can assure you that nothing has changed very much. In fact, history repeats itself over and over.” - Mark Minervini

It wasn’t until I suffered enough big losses that I made the decision that turned my performance from mediocre to stellar: I decided it was time to make money and stop stressing about my ego. I began selling off losing stocks quickly, which meant taking small losses but preserving the lion’s share of my hard-earned capital. Almost overnight, I regained a feeling of control.

I was analyzing my losers and learning from them. I saw my portfolio with fresh eyes and finally began to understand that trading is not about picking highs and lows or proving how smart you are; trading is about making money. If you want to reap big gains in the market, make up your mind right now that you are going to separate trading from your ego. It’s more important to make money than it is to be right.

Remember, if you choose not to take risks, to play it safe, you will never know what it feels like to accomplish your dreams. Go boldly after what you want and expect some setbacks, some disappointments, and some rotten days. Embrace them all as a valuable part of the process and learn to say, “Thank you, teacher.”

Chapter 3: SPECIFIC Entry POINT ANALYSIS: The SEPA STRATEGY

SEPA is short of Specific Entry Point Analysis , method developed my mark.

Chapter 5: Trading with The Trend

4 Stages of Stock

Where we are at mountain

Trust But Verify

The goal is not to buy at the cheapest price but to sell your stock for significantly more than the price you paid in the shortest period. That’s how superperformance is achieved.

Chapter 12: Risk management Part 1

Losses Make You Work Harder

When you lose money on a stock trade, you will need a greater percentage gain to get back to even because losses work against you geometrically. For example, if a stock declines 50 percent in price, let’s say from $28 to $14, that stock will have to rise by 100 percent (from $14 to $28) to get back to even. That’s worth repeating: a 50 percent decline in price requires a double to break even.

The lesson here is never to permit yourself to lose an amount of money that would jeopardize your account. The larger the loss is, the more difficult it is to recover from it.

Knowing When You’re Wrong

I’ve been asked, “How do you know when you’re wrong?” My answer is always, “The stock goes down.” It’s that simple.

As a matter of fact, I will often sell a stock if it doesn’t go up shortly after I buy it. Even though it has not gone down, if the stock doesn’t do what I expected it to do, that’s reason enough to step aside and revaluate. When a stock you have bought falls below your purchase price, it is telling you have made an error—at a minimum in timing. Make no mistake, whether you’re a short-term trader or a long-term investor, timing is everything. Just as much money is lost on great companies bought at the wrong time as on investments that were poor choices in the first place.

Regardless of your methodology or approach to stock investing, there is only one way to protect your portfolio from a large loss, and that is to sell when you have a small loss before it snowballs into a huge one. In three decades of trading, I have not found a better way.

Avoid the Big Errors

Avoiding large losses is the single most important factor for winning big as a speculator. You can’t control how much a stock rises, but in most cases, whether you take a small loss or a big loss is entirely your choice.

Don’t Become an Involuntary Investor

Because investors hate to admit mistakes, they rationalize. They fluctuate from being “traders” when they’re right—getting in and out of profitable stock positions in the short term—to becoming “investors” when they are wrong. When their trades move against them and start to rack up losses, all of a sudden they decide to hold on for the long term. They become what Jesse Livermore called an “involuntary investor,” a person who harvests a bitter crop of small profits and large losses, the exact opposite of what you want to achieve.

Chapter 13: Risk Management 2: How to Deal with and Control Risk

I have two basic rules about winning in trading as well as in life: (1) If you don’t bet, you can’t win. (2) If you lose all your chips, you can’t bet. - Larry Hite

Build on Success

I view the objectives in trading as a three-tiered hierarchy. First and foremost is the preservation of capital. When I first look at a trade, I don’t ask, “What is the potential profit I can realize?” but rather, “What is the potential loss I could suffer?” Second, I strive for consistent profitability by balancing my risk relative to the accumulated profits or losses. Consistency is far more important than making lots of money. Third, insofar as I’m successful in the first two goals, I attempt to achieve superior returns. I do this by increasing my bet size after, and only after, periods of high profitability. In other words, if I have had a particularly profitable recent period, I may try to pyramid my gains by placing a larger bet size assuming, of course, the right situation presents itself. The key to building wealth is to preserve capital and wait patiently for the right opportunity to make extraordinary gains. —Victor Sperandeo

Diversification Does Not Protect You

You will never achieve superperformance if you overly diversify and rely on diversification for protection. During a bear market, almost all stocks will go down. By having your money spread all over the place, you accomplish three things

1. Inability to follow each company closely and know everything you should know about the investments
2. Inability to reduce your portfolio exposure quickly when needed
3. A smoothing effect that will ensure average results

Depending on the size of your portfolio and your risk tolerance, you should typically have between 4 and 6 stocks, and for large portfolios maybe as many as 10 or 12 stocks.

. If you’re a true 2:1 trader, mathematically your optimal position size should be 25 percent (four stocks divided equally). As a result, a stock that is a big winner will make a real contribution to your portfolio. In keeping track of 4, 5, or 6 companies, it is much easier to know a lot about each name than it is to follow and track 15 or 20 companies. If you’re holding many positions, it’s going to be difficult to raise cash and move quickly when the market turns against you.