Summary This is the book that definitively changed my trading forever. If you want to make money swing trading then this is THE book to read. Literally as soon as I finished this book I started making money trading and I was up 45% in my account in 6 months following the principles laid out here. Minervini trades in a style that is similar to William O’Neal (author of How to Make Money in Stocks and creator of the CANSLIM methodology) and David Ryan (pupil of Bill O’Neal and also US Investing Champion). Minervini is also a close friend to David Ryan and they are hosts of the Master Traders Program (which I attended the first time this year 2020).
First steps to thinking and trading like a champion:
This book summarizes decades of Minervini’s experience as a successful trader combining both technical and fundamental analysis. The introduction is extremely motivating and if you are doubting yourself as a trader, seriously read the introduction and you will feel like anything is capable. The “champion” mindset is something really important to Minervini and I can tell that he has been so successful as a trader because of this mindset. He really makes you think that ANYONE can become a trader, it is not about talent but about hard work. I used to have this internal battle myself. My father worked on Wall Street and always told me that I would never become a succesful trader at home because no one makes money like that and if you are not a mathematician or genius then there is no way to be good at trading. That is farther than the truth. As Minervini says himself: “The success I eventually achieved didn’t come from natural talent. Uncondintional persistence and learned discipline brought me where I am today. (…) Thoe who succeed big at anything all have the same attitude: You keep going until it happens or you die trying. Quitting is not an option.”
Section 1: Always go in with a plan:
Minervini illustrates how important it is to have a plan for every trade. ” Before I make a trade, I have already worked out responses to meet virtually any conceivable development that may take place.” Criteria such as where to get out if a trade goes against you, when to sell, when to purchase the stock again if you are stopped out, selling into weakness to protect a profit, etc.
One key difference between an amateur and a pro is that a pro will get stopped out once or twice and be completely disconnected from that trade. An amateur might get stopped out twice and not take the stock the third time when it sets up again.
As soon as a position is bought, it must move quickly. The ideal situation is a breakout from a base and multiple days of follow-trough action. the best trades rally for several days on increased volume. Never let a 20%+ profit become a loss. Look for tennis balls and not eggs. Minervini describes the best stocks as tennis balls, that breakout and pullback on light volume and act like tennis balls, they bounce right back up.
Winning stocks will display the following characteristics:
follow-through price action after breakout
more up days than down days
tennis ball action – resilient price snapback after pullback
strong volume on up days and week volume on down days
more good closes than bad closes
When not to sell extended stocks
David Ryan´s MVP indicator:
Momentum – stock is up 12 out of 15 days
volume. volume increases 25 percent or more during the 15-day period
price. stock price is up 20 percent or more during 15 days (the larger the move and stronger the volume the better)
Violations
Watch the 20-day line soon after a base breakout, it should hold that line and not undercut it.
Three lower lows on volume should get your attention
low volume out, high volume in – bad sign
Violations after a breakout:
low volume out of a base – high volume in
3 or 4 lower lows without supportive action
more down days than up days
more bad closes than good closes
a close below the 20-day Ma
a close below the 50-day MA on heavy volume
Squats and reversal Recoveries
A squat is when a stock breaks out through a pivot point but falls back into its range and closes off the days high, thus squatting. Sometimes the stock will reverse and recover soon after. This can be anywhere from 2-10 days. In recent markets this has been happening a lot to me (October – December 2020) there has been a lot of volatility and a lot of stocks squatting. Some reverse a few days later and breakout again, others just fail.
Indeciseviness and regret
All traders vacillate between indecisivenes and regret. Minervini states that this dilemma stems from not establishihg a clear timeline and solid plan upfront.
One rule that I got from this book that really helped my trading was to sell 50% of your position if you are in doubt. That way, if it moves up more, you still have a large amount to make profits. If it moves against you and hits your stop you still make a profit.
Section 2: Approach every trade risk-first
When placing a trade, most people think ” How much money will I make if this moves up X %? “. Minervini challenges us to think the opposite. IF this stocks moves AGAINST me and hits my stop, how much am I willing to lose? A lot of people get into trades and say they will risk a certain amount and when the stock reaches halfway to their stop-loss they are already out. This is not a good way to trade.
On average, a good trader will be right 50% of the time. The best traders may pick wining stocks about 60-70% in a healthy market.
If your goal is big performance, large losses are unnaceptalbe and coutnerproductive
Trade with a stop-loss always
dont become an ” involunatary invesetor”
Section 3: Never risk more than you expect to gain
in order to set an appropriate stop-loss you must know your average gain, and not just what you hope to make on each trade, but a number that you can expect to occur over time on average.
Minervini argues that you must get used to building in “failure”. The smaller the losses in relation to the gains, the better. It is better to have only a 25% batting average (you are wrong 75% of the time) but take really small losses and make huge winners. He then goes into some research he has done regarding optimal percent gains and losses according to each batting average. It is VERY interesting. Here is a chart from this section:
I am a member of Minervini’s private access and he constantly reinforces the importance of risk management. He is so good at risk management and this is the most important part of trading successfully.
Section 4: Know the Truth about your trading
For Minervini, tracking your numbers in trading is the most important thing to succesfull trading. When I started out as a trader, I would just trade and look at my P&L and measure my succes by that. That is so limiting…I now have an excel that tracks every single trade and tells me in real-time what my batting average is, how many days I am in a trade, etc.
As a member of MPA (Minervini Private Access) he gives you proprietary technology that allows you to track your trading results. I do not use it because I don´t want to have double the work by logging trades into my own spreadsheet as well as Minervini’s platform. But it is very useful if you are not good at Excel.
Here is an example of what Minervini tracks on a monthly basis, as highlighted in this chapter:
Some basic stats that you MUST keep track of as a trader are:
Average win, average loss, win/loss ratio, batting average (% of winning trades), adjusted win/loss ratio (adjusted for batting average), largest wins, largest losses, number of days gains held, number of days losses held.
Another important stat that Minervini talks about is turnover. A higher turnover of relatively small gains can mean significantly higher returns compared to lower turnover with higher gains. This is why a lot of day traders make 1000% returns ( most of them fail miserably after that though)
To compound or not to compound
This section for me is very confusing because Minervini gives compelling evidence that compounding your returns can also lead to devastating losses. So his advice is not to compound. So for example if you are trading with 100k account, and risking 1% on every trade, that is $1,000. If you are up 50% in the account, the 1% risk is no longer $1,000 but is now $1,500. As a member of MPA he advises us to compound our returns ONLY if we are a) up a significant amount in the account and b) our trading has been positive and c) have the confidence and experience to do so.
As you can see in the results, with the exact same batting average and trading strategy, a trader who is compounding will be negative vs the trader who is not. In my personal experience, I will only start compounding results once I am up a significant number. For example, this year I was up 28% on one of my accounts and my winning trades were not growing the account as fast as they were before. So I was making $800-1000 per trade, and it was taking me longer to get the account up 5-10% more. So I started increasing size so that the winners were now up $1,500-1,800. Again, trading is an art and it depends on your style, but the research done by Minervini is very eye-opening.
How and When to Buy Stocks
Understand the 4 cycles of the market: consolidation, accumulation, distribution, capitulation.
Look for stock in a Stage 2 uptrend: accumulation Minervini mentions his “trend template” which is currently available on MarketSmith software (another reason why I am a huge fan of Marketsmith).
Volatility contraction pattern: This is the most important thing I have learned in this book. This concept is universal, it applies to almost any asset in almost any time-frame. This has helped my trading immensely. As the name implies, a volatility contraction pattern occurs when the volatility on the right side has decreased, the price has tightened, and you wait for a breakout from that pivot point. Minervini likes to measure the contractions and usually looks for 3-4 contractions to occur for the pattern to validate.
As you can see, the price tightens, volatility contracts, and you wait for a pivot point to enter. If you pull up a 5-min chart this will also happen intra-day. This entry point is essential for timing the best low-risk trade.
The Low Cheat:
This is the second most important concept I have learned in this book, followed by the VCP. The low cheat is a pivot point that occurs before a full cup and handle formation. The stock is selling off of a recent high and starts to build a right side.
This is probably my #1 trade setup. This concept has changed my trading so much and I highly recommend all swing traders to master this chart setup. Sometimes I will not trade a cup and handle formation if I have missed the low-cheat entry. This is a setup for more experienced traders and it will be difficult to spot early on. I have trouble myself spotting low cheats if they are not crispy clean.
When To Sell
- New highs from late 4th or 5th stage bases
- P/E expansion by twice or more during late-stage price action
- Look for a climax top – if a stock advances 25-50% or more over the course of 1-3 weeks. Some advance 70-80% in 5-10 days. Count the up days, if there are 8/10 up days and high volume on a daily bar (the highest ever) then start selling into this strength.
- Once stock is extended, 6 to 10 days of accelerated advance with all but 2 or 2 days being down
- largest up day since beginning of move
- widest daily spread from high to low
These are the main concepts highlighted in the selling chapter. The P/E expansion concept is very interesting and something that I have started paying attention to. Usually a stock that begins its rally and reaches a climax top will have doubled its P/E ratio (if the PE is high or low this is completely irrelevant). If the PE is at 50 when the stock was trading as 15 and now the stock is at 60 and the PE is at 100, this could be a potential warning sign.
Final Thoughts
This is the BEST book I have read on trading. My trading today is 90% based on all teachings in this book and I can only thank Mark Minervini for writing it. I have attempted to review it without giving away too much. There is so much detail in the book and there are hundreds of examples he goes through and I highly recommend reading the book at least twice. What I enjoyed most about the book is that the concepts are timeless. They worked 30 years ago and continue to work now. They work on almost any time frame.
Favorite quotes
Just my opinion, but Mark would make an awesome coach, he is such a boss at motivating traders and when I read this book I felt like nothing was impossible.
“Let me assure you, anyone can achieve super performance in stocks if they set their mind to it. It requires the right knowledge, a commitment to the learning process, and the will to persist.”
“The success I eventually achieved didn’t come from natural talent. Unconditional persistence and learned discipline brought me where I am today. And I know, even today, if I break my discipline, I could easily go from success to failure. Those who succeed big at anything all have the same attitude: You keep going until it happens or you die trying. Quitting is not an option. “
“Success comes one way: hard work and humility. In the stock market, those who are not humble are destined to be humbled.”
“Trading is one of the most potent litmus tests for showing what you’re made of. You’ll find out, and fairly quickly, if you are capable of doing what’s required, emotionally and physically. If you are unwilling to make the right choices, that lesson is likely to be a painful one.”
“Long-term success in the stock market has nothing to do with hope or luck. Winning stock traders have rules and a well-thought-out plan. Conversely, losers lack rules, or if they have rules, they don’t stick to them for very long; they deviate.”
Score
- Practical: 3 – Once I mastered the concepts in this book I started applying them straight away to my trading. This is a very hands on type of book and you can start using this strategy tomorrow.
- Readability: 3 – Very great read, a good mix of motivational coaching, trading history, strategies, examples, and clear chapter separation.
- Originality: 3 – Taught by none other than the market wizard Minervini. This is decades of his own experience and you are reading from a great trader and not some Ivy League scholar.
The Trader's Journey 
Thank you for sharing, I enjoyed the article and found it very helpful. In Figure 4.2 it shows the average hold period for winning trades to be 26 days – in your own trading have you found that to be a fairly representative or typical length of time to hold a position? I was also wondering about how closely you need to be at your desk once in a position – does managing a trade need a lot of babysitting and being glued to your desk, or can it be done more from a distance. Many thanks
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Hey Davy, thanks for the positive comment. In my experience, my average days hold is around 8 WORKDAYS, so around 12 regular days if you count weekends.
In regards to your second question, it really depends on the market environment. Swing trading usually allows for higher flexibility. When the markets are good you can usually enter positions and let them rip all day. In bad markets (choppy ) like we are in now, it´s a lot harder to get traction and you can either sit out and wait for market to improve or try to manage risk tighter and trade in and out faster, which requires more screen time. But you can set alerts and go do other stuff and when your alerts are hit you can enter the positions on your app, so there are ways to get around it. I don´t sit at the desk all day since I have other stuff going on.
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Thanks for answering so clearly. Wow that’s a pretty short turnaround, I guess that frees up capital more quickly for more trades. I’m halfway through his first book Trade Like a Stock Market Wizard and most of the charts showed Stage 2 movements lasting months, which was why I was surprised to see 26 days as the average winning trade length – I thought the winning trades would be much longer.
Once you got the hang of the material, how much time do you find is needed for the daily screenings/research, and which screening service/software have you found useful? Am thinking about taking the plunge in a couple of weeks for the 2021 Master Traders Program.
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Ah yes I reread and see you rate Marketsmith very highly
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As I said, it depends on the market. Last year, Stage 2 lasted for many months. Tesla is a great example of this. This year 2021 has been much harder, with a lot of fake breakouts and poor bases. I use Marketsmith and it is great but a bit SLOW for me, which is really annoying they could make it better.
I do a long screen on Sunday and make a watchlist for the week this usually takes me 1, 1.5 hours. Then about 2 hours before market opens I run all of my scans daily and see if i am missing something and set my alerts for the stocks in my watchlist. I will run some intra-day scans for large volume gappers stuff like that. Overall, I spend 1 hour daily with my scans. I would move quicker if marketsmith wasn’t so slow. With time you can scan quickly. But scanning and preparing is the most important part. during the actual trading day I am looking at other stuff so i find its more important to be at the screen in the morning.
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Thank you for sharing about the time commitment, it’s encouraging that most of the preparation work can be done outside of market hours and that you don’t necessarily need to be stuck at the desk all day long.
Interesting to hear that the market this year has been challenging for this style of trading with fake moves and the like – I noticed Minervini recently reported being up 277% so far for the year, which is all the more impressive in that case.
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Just received your Trading Reflection for 2021. It was a great read, thank you for sharing and well done on the crypto trades and successfully using the VCP on ETH and BTC. Looks like it was a tough market for swing trading on US stocks, I’ll be interested to see how things go for you next year. It seems Minervini himself held his trades on a very short leash this year, exiting within just a few days at most, almost scalping.
You mentioned you find MarketSmith quite slow. I wonder, would it not possible to do the technical scans in another, faster software such as TC2000 or Tradestation? And then any symbols that look interesting there could be examined for their fundamentals back in MarketSmith? It doesn’t look like there’s a Dark Mode in MarketSmith, so another advantage might be to view all the charts with a dark background in the other software.
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Hey Davy, Thanks for the reply. I was traveling and just got back. I hope 2022 is a better year for trading!
Minervini definitely did a LOT of short-term trading, most of it intra-day trading actually. He is VERY good and it is hard to replicate that type of trading. One day hopefully =)
Yes Marketsmith is slow and really annoys me and I know a lot of traders use TC 2000 so I think I might give it a try and switch to MSMITH just for fundamentals. Thanks for the suggestion. I am also going to give Tradestation a shot I like the charting software there.
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Something caught my attention when you said that it is better to not compound. IMO, Mark’s example is too extreme (with 40% losses) and it just serves as a warning about what losses can do to your capital.
I made a spreadsheet just like Mark’s and modified the G/L% to 20/10% and the final result is Non-compounded: 460k and Compounded: 2.7M
In the end, compounding is better with a good risk management. Cheers!
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