This article is about how I made 23.17% in 33 days while risking only 5.96%. It’s a tale not just of numbers but of timing, trend analysis, and understanding the market’s pulse. This journey through the ups and downs of the stock market reveals a clear path to profitable trading, even in conditions that many might find less than ideal.
Unlikely Hero: an Old Uptrend
Most shy away from stocks that have been climbing for years, fearing that the end of the ascent is near. Yet, my experience shows that an old uptrend can still offer substantial rewards. The secret? Institutional buying. When the big players are still interested, it’s a signal that there’s more room to grow.
Strategic Entry
This serene moment in the market’s usual tumult signaled an opportunity too compelling to ignore. The heavy volume accompanying this late-stage breakout wasn’t mere background noise; it was a resounding endorsement from the market, echoing the sentiment that, despite conventional wisdom, the climb was far from over. Venturing into this trade was akin to spotting a rare consensus among seasoned veterans, a signal so strong it couldn’t be overlooked.
Challenge of Later Stages
Engaging with a stock in its 5th stage of base-breaking posed a unique challenge. Traditionally, such stages are met with skepticism due to their inherent volatility and the heightened risk of a downturn. However, this instance presented an anomaly – stability in a phase known for its unpredictability. This divergence from the norm wasn’t just intriguing; it was a clarion call for those willing to read between the lines, suggesting that despite the perceived late entry, the journey upward had the backing of solid market confidence.
Expectations and Risks
The bedrock of my trading philosophy is a deep respect for risk management. When a stock breaks from its base, I set my stop-loss 7 to 8 percent below the purchase price. This strategy acts as my safety net, cushioning me against the unpredictable swings of the market. Conversely, when I engage with a stock outside its breakout phase, I opt for a tighter safety margin, placing my stop-loss just 3 to 5 percent below my entry point. This dual approach tailors my risk exposure to the specific context of each trade.
Diversification and disciplined risk allocation further fortify my strategy. I impose a strict limit on myself: never risking more than 2% of my entire account on a single trade. This rule is my bulwark against volatility, ensuring that even in the face of market tumult, my financial footing remains secure. It’s a testament to the delicate balance between boldness and caution that defines my trading journey.
Power of Institutional Support
Institutional ownership can significantly influence a stock’s performance. By focusing on stocks under accumulation by institutions, I leveraged their extensive research and market power. This approach provided a solid foundation for my trading decision and ultimately led to a substantial return.
details at a glance
Explanations for the Drawing
The upward purple arrow shows where I bought the stock. The downward purple arrow shows where I sold it.
Green Line 21-day exponential moving average line (see EMA 21 below)
Red Line 50-day simple moving average line (see SMA 50 below)
Black LIne 200-day simple moving average line (see SMA 200 below)
Opening
- Underlying: TDW
- Date: 1 Mar 2024
- Underlying Price: 79.40
- Stop Loss: 74.64
- Profit Target: 95.28
- Market Outlook: Confirmed uptrend
- RS Rating: 87
- RS line trend: N (Neutral)
- Industry Rank: 157 / 197
- Volume U/D Ratio: 1.0
- Institutional Ownership Trend: U (Up)
- Position risk, %: 5.96
- Position Risk to NL, %: 0.43
- Potential Profit (position), %: 19.87
- Risk to Reward Ratio: 0.30
- Position size, %: 7.27
- “Why did I open this trade at that point?”: “The stock broke out of the base with huge volume. The price action showed contracting volatility. The stock is under accumulation by the institutions.”
- “Was it an ideal buy? YES
- Remarks: “The price trend is very old – it has lasted since 2021. That makes the investment riskier. Some other risks: Industry rank is low: 157/197 and RS trend is neutral, not up.”
Closing
- Date: 3 Apr 2024
- Price (close): 98.92
- Market Outlook: Confirmed uptrend
- RS Rating: 96
- RS Change: 9
- Remarks: “Realized a profit. This trade was a rare case because of these things: – RS trend was not in the uptrend – Industry Rank was low – Stock trend was old. Still, it worked out better than expected. Probably institutions are accumulating the stock heavily.”
Results
- What went well?: “It was an ideal trade. I bought the stock when it broke out of its base with huge volume. Sold at a higher price than the profit target. When I bought the stock, it had tight price action.”
- Cause of Error / IMPROVE: “Even though I captured a bigger profit than planned, I wasn’t completely aware of my profit target price. I need to pay attention to that as well.”
- Lessons Learned: Even late-stage bases can work out.
- Position ROI, %: 23.17
- Position ROI (portfolio), %: 1.68
- Position Open Time (trading days): 22
- Position Open Time (days): 33
terms and definitions
EMA 21 Calculates the 21-period exponential moving average, highlighting short-term trends.
SMA 50 Averages the price over 50 periods, showing medium-term trends without overemphasizing recent data.
SMA 200 Averages the price over 200 periods, revealing long-term trends by treating all data equally.
Industry Rank Investor’s Business Daily’s system that ranks industries 1 to 197 based on performance. It guides us in CAN SLIM TRADING towards leading sectors.
U/D Ratio Measures stocks closing up versus down. A ratio above 1.0 indicates bullish sentiment, important in CAN SLIM TRADING.
RS Rating Ranks a stock’s performance on a 1 to 99 scale. I look for at least 85, showing strong momentum and growth potential.
RS Line Compares stock price to the market, plotted as a ratio. We seek an uptrend, indicating outperformance and strong momentum.
Volatility Measures how much a security’s price fluctuates over time. High volatility means large price changes, indicating risk and potential reward.
Institutional Ownership Trend indicates whether the stock is under accumulation or distribution by the institutions.
EPS (Earnings Per Share): A financial metric calculated by dividing a company’s net profit by the number of its outstanding shares. It indicates the amount of profit attributed to each share of stock, serving as a key indicator of a company’s profitability.
Overhead Supply: is a stock market term for a large amount of unsold shares at a certain price level, acting as resistance that prevents the price from rising. It occurs when investors looking to sell at break-even points add to the supply, making it hard for the stock to increase in value until this excess is bought up.
stages
Stage 1: Basing or Bottoming Stage
Definition: A period following a stock’s decline where it starts moving sideways, forming a base. This stage signifies the easing of downward pressure and the beginning of stabilization, indicating that the stock is not in an uptrend yet but is preparing for potential future growth.
Stage 2: Advancing or Uptrend Stage
Definition: The phase in which a stock breaks out of its base on significant volume, indicating a strong buying interest and the initiation of a new uptrend. This stage is considered the most opportune time for investors to purchase the stock, as it is expected to achieve substantial gains.
Stage 3: Top or Peaking Stage
Definition: A stage characterized by the stock beginning to exhibit signs of losing momentum after its upward movement. The stock may start to move sideways with increased volatility compared to Stage 1. This suggests the stock might be reaching its peak, and the existing uptrend could be weakening.
Stage 4: Declining or Downtrend Stage
Definition: This final stage occurs when the stock breaks down from its Stage 3 pattern and enters into a downtrend, marked by a sequence of lower lows and lower highs. It signifies that selling pressure has surpassed buying interest, usually serving as a signal for investors to sell the stock to mitigate further losses.
CAN SLIM EXPLANATION
The CAN SLIM strategy is a comprehensive investment methodology developed by William J. O’Neil. It is designed to guide investors in identifying high-growth stocks before they make substantial price advances. Each letter in “CAN SLIM” represents a key component of this strategy:
- C for Current Earnings: Look for companies with a strong record of quarterly earnings growth, specifically those showing a significant percentage increase in earnings per share (EPS) in the most recent quarter compared to the same quarter in the prior year.
- A for Annual Earnings Growth: Focus on companies that demonstrate a solid track record of annual earnings growth over the last five years, highlighting an ongoing ability to increase profitability.
- N for New Products, New Management, or New Highs: Invest in companies benefiting from new products, new management, or new market highs. This principle is based on the idea that stocks often reach new highs in price because of new conditions, driving their growth and investment appeal.
- S for Supply and Demand: Shares outstanding plus big volume demand for a stock can drive prices up. This part of the strategy emphasizes buying stocks that not only have strong demand but also a limited supply of shares.
- L for Leader or Laggard: Invest in market leaders rather than laggard stocks within the same industry. Market leaders are identified by their strong price performance and market share.
- I for Institutional Sponsorship: Seek stocks that have the backing of institutional investors, such as mutual funds, pension funds, and hedge funds. The premise is that the support from big players can fuel a stock’s upward journey.
- M for Market Direction: Understand the overall market trend by analyzing major indexes like the S&P 500 or the Nasdaq Composite. The strategy suggests investing during a confirmed market uptrend and considering selling stocks when the market trend appears to be heading downward.
Conclusion
Making a significant return on investment in the stock market is entirely possible, even when dealing with stocks that have been in an uptrend for an extended period. The key is to understand the signals that indicate continued growth, such as institutional buying. By managing risks carefully and choosing the right moment to enter the market, you can significantly increase your chances of success. And remember the #1 Metric that determined the stock price was the institutional ownership uptrend.
