Schooled by the founder of CAN SLIM® Ross Haber leverages years of experience, developing proprietary methods for sound, future-proof investments. Co-author of the in-house “The Model Book of Greatest Stock Market Winners,” Ross spent his time traveling around and teaching aspiring and seasoned traders at multi-day investment workshops. Throughout his career, he has honed his skill for identifying winning stocks and is well versed into recognizing the ones that outperform the general market.
The first thing before a position is initiated is a clear plan must be in place detailing specific entry areas, their associated sell stops, and potential profit taking zones.
Never trade without a plan. Never enter a trade without a clear understanding of exactly where your entry and exit areas are and why they are there.
There are endless factors to consider such as an individual trader’s personal objectives and goals, their personal progress at any given point, the state of the general market and the many fundamental and technical factors relevant to each individual stock, its sector, industry group and its overall strength relative to the rest of its industry
Risk management is the golden key to consistent success in the stock market. Yes, it is even more important than stock selection.
This is why Bernard Baruch, stock trader and close friend of Livermore said that cutting losses short is crucial. He continued that if a speculator is right half of the time, he’s hitting a good average. Even being right three or four times out of ten should yield a person a fortune if he has the sense to cut his losses quickly on the ventures when he is wrong.
Trading without a sound risk management strategy is no different than gambling in Las Vegas.
Look for companies with annual earnings that are positive and have been increasing year over year for at least three years. Also look for companies with at least 25% quarter over quarter growth in earnings and sales for a minimum of three quarters. These are early indicators of companies that may be ready to explode in growth.
Three-quarters of all stocks follow the direction or trend of the general market. William O’Neil would often say that getting this part of the equation correct is more than half the ballgame. At TraderLion, we have a very specific, quantifiable technique that we use to determine the direction of the general market.
Keep in mind however that the stock market is half science and half art. Hence, this only solves the first half of the equation. The other half involves qualitative factors which largely concern the overall health and breadth of the market’s leadership. Understanding how to correctly interpret the action of the market’s leadership is crucial, especially when the general market is in a correction or consolidation mode. Healthy rotation is always the key.
This aspect of trading is not given anywhere near the attention it needs and deserves. Understanding how to properly manage one’s emotional and psychological capital is every bit as important, if not more so than the proper management of one’s financial capital.
Understanding how they factor into your trading process is also extremely important. Keep in mind, this goes well beyond simply understanding your psychology and emotions as they pertain to trading. How you handle your personal life plays a big role as well. For example things like your health, the health of your loved ones, all of your relationships and personal finances are just as important as your trading and must be kept in balance as best as possible. Trading in the Zone by Mark Douglas is one of Ross’ favorite books covering this topic.
Buy the strongest stocks, in the strongest groups, with the strongest fundamental story and strongest growth characteristics. Period.
There are many ways to calculate relative strength, however, Ross personally finds Investor Business Daily’s proprietary Relative Strength (RS) rating and RS line to be extremely effective.
In general, the RS line for a stock should be in an uptrend and at a bare minimum, confirming new highs in price as a stock moves higher. When the general market is consolidating or correcting, the RS line will start to make new highs ahead of a stock’s price. This is a sign of power and strength that is often a clue that stock is getting ready to move higher.
IBD’s proprietary RS Rating goes from 1 to 99 with 1 being the weakest and 99 being the strongest. Try to buy stocks with an RS rating in the 90’s, preferably 95 and over.
The more money you manage, the more you will learn to love liquidity. There is nothing like being able to push a button and being able to fill your entire stock order instantly with the price of the stock moving very little. There comes a point, however, where extremely large-cap stocks can become quite sluggish and slow.
There are some super large-cap liquid stocks that are extremely powerful. But according to a 40-year study performed by William O’Neil + Co., it was identified that more than 95% of the companies which had fewer than 25 million shares in their capitalization did so when they had their greatest period of earnings improvement and stock market performance. That being said, if all else is equal when given the choice between two stocks, choose the stock with the lower amount of total shares outstanding in their capitalization
Extremely large banks, mutual funds, hedge funds, trust companies and other large financial institutions of this nature account for over 70% of the market’s total volume. Some of these companies manage hundreds of billions of dollars. So when one of their portfolio managers decides to take a position in a stock, it can take weeks to months for them to accumulate a full position.
Adding to this, there are still all of the other fund managers out there with enormous portfolios to invest that also decide to take positions in the same stock which also require the same amount of time given the amount of cash they are managing. It is often very difficult for large institutions to hide their tracks especially when they are all trying to pile into these same stocks. It is for this reason why heavy volume accumulation or distribution is so important and is frequently used as a sign of big institutional players entering or exiting a specific stock
Always use stock charts to enter and exit a stock at its optimal point. This is the point where risk/reward is highly skewed in your favor. Limit your buying activity to stocks that have formed constructive bases.
Don’t buy a stock as it goes through a pivot point or trend line unless it is trading well above its average volume for the day. Don’t purchase a stock more than 3% past its pivot point. Some stocks may warrant a tighter buy limit of 1-2% from their pivot depending on their personality and the market environment
The United States is often on the leading edge when it comes to developing new products and services that change the way we live, work and communicate. These companies are the lifeblood of a healthy bull market and the key ingredient to a sustainable uptrend.
Every bull market or uptrend is led higher by at least two or three groups of well-established leadership and every new bull cycle should be led by a fresh batch of new leaders. Very rarely does the old leadership from a prior cycle come back to life and the ones that do, typically take a very long time.
Full Blog and Video Walk-through of our Philosophy: https://www.traderlion.com/trading-strategies/the-10-essential-trading-principles-every-trader-needs-to-know/
Industry: Software – Enterprise
Summary: Shopify Inc. provides a cloud-based multi-channel commerce platform for small and medium-sized businesses in the United States, the United Kingdom, Canada, Australia, and internationally.
SHOP‘s qtr. over qtr. EPS and sales have been very strong for the last 8 qtrs. and then some. However, it’s worth noting that SHOP’s September’s qtr. over qtr. EPS dropped off into the red on both the September ’18 and September ’19 qtrs., despite revenues maintaining their solid double-digit growth of about 50%.
The only other chink in SHOP’s armor is that it is currently forming a 6th stage base, which is considered late and thus has a much higher probability of failing than a stage-1 or stage-2 base. Otherwise, SHOP is a big leader in its group with a relative strength rating of 98 and huge pick-up in institutional sponsorship, each quarter, for the last 8 quarters in a row.
SHOP has been a stellar performer since July 2016. It broke out through $164.13 on 1/31 and hit an all-time high of $409.61 on 8/27 for a gain of 150% in 28 weeks. Despite a few shakeouts below its 21-DMA and 23-EMA during its massive run, it respected its 50-DMA and 65EMA until it topped and rolled over.
SHOP is currently attempting to break out from its most recent, late-stage base, which intrinsically carries much higher risk, although it appears to be back under accumulation, since the beginning of December.
Sector: Health Care
Summary: Arrowhead Pharmaceuticals, Inc. develops medicines for the treatment of intractable diseases in the United States. Some of the company’s pipeline includes ARO-AAT, a RNA interference (RNAi) therapeutic candidate that is in Phase II clinical trial for the treatment of liver diseases associated with alpha-1 antitrypsin deficiency & ARO-APOC3, which is in Phase I clinical trial to treat hypertriglyceridemia.
ARWR has sported triple digit EPS and sales growth for the prior 4 quarters, a sharp increase in institutional sponsorship over the last 8 quarters, not to mention, a big turnaround in ROE over the prior 4 quarters.
ARWR triggered two clear entry areas at the beginning of its run. It then went on to form a constructive base over the next few months and broke out on massive volume, offering a couple more entry areas along the way.
ARWR then continued higher in an organized, stair-step pattern as its rate of ascent steepened.
ARWR broke out through $15.13 on 2/8/19 and traded as high as $73.72 on 11/29/19, which so far, is a gain of 387% in 40 weeks.
Summary: Brookfield Renewable Partners L.P. owns a portfolio of renewable power generating facilities primarily in North America, Colombia, Brazil, Europe, India, and China. The company generates electricity through hydro, wind, solar, cogeneration, and biomass sources. Its portfolio consists of approximately 17,400 megawatts of installed capacity.
BEP‘s quarter over quarter earnings were growing at a solid triple digit pace until its most recent quarter. Also, the alternative energy stocks have been a leading industry group since the beginning of the year and BEP has been one of its top performers.
BEP broke out through $29.11 at the beginning of February 2019 and hit an all-time high of $48.72 on 12/10/19 for a gain of 67%. This stock trades in a very tight and organized manner, has yet to close below its 65-EMA and has respected its 23-EMA throughout the majority of its run. Stocks that trade in this manner are much easier to hold.
Industry: Software – Enterprise
Summary: Cardlytics, Inc. operates a purchase intelligence platform in the United States and the United Kingdom. It operates in two segments, Cardlytics Direct and Other Platform Solutions. The company’s platform is the Cardlytics Direct solution, a proprietary native bank advertising channel that enables marketers to reach consumers through their trusted and frequently visited online and mobile banking channels.
CDLX reported 120% growth quarter over quarter for the most recent quarter, backed by a 63% increase in sales. Also, institutional sponsorship has exploded over the prior 8 quarters.
CDLX’s float is just 14.7 million shares and its 50-day average volume is 530,000 shares, which makes for a powerful mover.
CDLX broke out through $19.98 on 5/10/19 and made a new all-time high of $65.43 on 12/5/19, for a gain of 227% and appears ready to head even higher.
CDLX has respected its 65-EMA since in broke out back in May, so a close below this key moving average would be a major sell signal.
Industry: Construction Products
Summary: TopBuild Corp. engages in the installation and distribution of insulation and other building products to the United States construction industry. The company operates in two segments, Installation and Distribution. It offers insulation products, rain gutters, glass and windows, fireproofing and firestopping products, garage doors, fireplaces, shower enclosures, closet shelving, accessories, and other products; and residential insulation services.
BLD has been growing quarter over quarter earnings at a solid double-digit rate over the prior 4 quarters, although their sales growth has dropped off noticeably over the prior 2 quarters. This is a red flag and something to be aware of if BLD begins to break down.
BLD has been trading in a tight and organized manner since it broke out through $51.49 on 1/13/19. It has also shown great respect for its key moving averages along the way.
So far, any break of its 23-EMA has been contained by its 50-DMA and any break of its 50-DMA has been contained by its 65-EMA.
BLD hit an all-time high of $113.74 on 11/27, which is a gain of 121% in 42 weeks and it could easily continue higher from here.
Industry: Software – Enterprise
Summary: Coupa Software Incorporated provides cloud-based business spend management platform. The company’s platform connects organization with suppliers globally; and provides visibility into and control over how companies spend money, as well as enables businesses to achieve savings that drive profitability.
COUP has shown extremely strong EPS and sales growth, quarter over quarter for the last 8 quarters, not to mention, its institutional sponsorship has risen swiftly and consecutively for the last 8 quarters as well.
COUP has shown tremendous power since the beginning of 2018 and has been one of the more stellar performers in the enterprise software group over the last couple years.
COUP broke out through $67.34 on 1/15/19 and hit an all-time high of $156.16 on 9/6/19, before rolling over and closing below its 65EMA for the first time. That is a gain of 132% in 31 weeks.
Also, COUP made a new all-time high of $159.97 on 10/14/19 and is currently building a new base.
Sector: Health Care
Industry: Medical Systems – Equipment
Summary: Israeli seller of radio frequency devices used in minimally & non-invasive cosmetic procedure/women’s health.
INMD has exhibited tremendous earnings and sales growth quarter over quarter for the last 8 quarters. Also, INMD’s industry group exhibited notable relative strength throughout 2019.
Unfortunately, there is only one quarter of sponsorship data currently available for INMD, so there is no basis for comparison yet. INMD is a recent IPO in the medical systems/equipment group which has been a very powerful leading group for over 2 years.
INMD became one of the most powerful stocks in the group very quickly after it went public and is now the most powerful stock in the group with a relative strength rating of 99.
INMD broke out through $29.38 on 10/22/19 and hit an all-time high of $58.76 on 11/18/19 for a gain of exactly 100% in slightly less than a month. Keep in mind, INMD was as low as $13.06 when it came public on 8/8/19. So, that would be a 352% gain in just 14 weeks, using its all-time high of $58.76 on 11/18/19.
INMD could triple, or quadruple again from here, however, it will have to be able maintain or improve its stellar record of EPS and sales growth for that to happen.
Sector: Health Care
Industry: Medical – Products
Summary: NovoCure Limited engages in the development, manufacture, and commercialization of tumor treating fields (TTFields) for the treatment of solid tumors.
NVCR got a pass early on even though it was lacking the quarter over quarter EPS growth. Actually, it was devoid of EPS altogether until its most recent quarter.
This is because it was a top performing stock in a robust group of leaders, with a great story. NVCR has a state-of-the-art medical technology known as Tumor Treating Fields, which are proving effective in fighting many kinds of solid tumor types, including some of the most aggressive forms of cancer.
When a company is drastically changing people’s lives in the way that NVCR has been doing, it’s ok to make an exception for their EPS because everything else is hitting on all cylinders. NVCR is a great example of a stock that stair-steps its way higher in an organized manner, respecting its 21-DMA and 23-EMA the entire way, which makes it much easier to know when to sell.
Another benefit of a stock that trades in this manner is that it is much easier to have conviction adding to your position when it pulls back to logical support. It always looks easy in hindsight, but when the general market is under pressure and emotions are running high, the last thing most traders want to do is buy, even when a stock is at logical support. This is why it’s so important to have sound rules and a plan.
NVCR broke out through $49.09 on 5/9/19 and hit an all-time high of $98.70 on 8/21/19, which is a gain of 101% in 14 weeks.
Industry: Software – Enterprise
Summary: Paycom Software, Inc. provides cloud-based human capital management (HCM) software service for small to mid-sized companies in the United States. It provides functionality and data analytics that businesses need to manage the employment life cycle from recruitment to retirement.
PAYC is one of the most fundamentally sound companies in its group. For the last 8 quarters PAYC has shown extremely consistent double-digit EPS and sales growth quarter over quarter as well as annually, not to mention a very high and consistent ROE.
PAYC’s institutional sponsorship has grown for 7 of the last 8 prior quarters and is highly populated by high quality holders.
PAYC broke out through $137.21 on 1/18/19 and hit an all-time high of $259.71 on 8/29/19 for a gain of 89% in 30 weeks, even after cranking out incredible gains over the prior few years, and it appears to be setting up to continue even higher.
Industry: Home Furnishing
Summary: RH, together with its subsidiaries, operates as a retailer in the home furnishings. It offers products in various categories, including furniture, lighting, textiles, bathware, décor, outdoor and garden, tableware, and child and teen furnishings.
RH has shown explosive EPS growth quarter over quarter for the last 8 quarters, yet their accompanying quarter over quarter sales have been tepid to say the least.
Regardless, the street is still looking for 54% annual growth in 2020, which is comforting given their unusually weak sales.
RH broke out through $118.31 on 7/1/19 and hit an all-time high of $243.67 on 12/6/19, for a gain of 106% in 21 weeks.
RH exhibited a clear respect for its 23-EMA and 50-DMA as it stair-stepped its way higher in a very organized manner. Stocks that trade this way are typically much easier to hold than stocks that trade in a wide and loose fashion, with little respect for their moving averages.