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How to Trade Like a Champion Market Wizard

Insights from Trading Legend Mark Minervini

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www.tradersonline-mag.com 08.2015

Insights from trading Legend Mark Minervini

How to trade Like achampion Market Wizard

Investing styles may differ among successful market players, but without exception, winning stock traders share

certain key traits required for success. Fall short in those qualities and you will surely part ways with your money.

The good news is that you do not have to be born with them. Along with learning effective trading tactics, you

can develop the mindset and emotional discipline needed to win big in the stock market. Two things are required:

a desire to succeed and a winning strategy. There is a big difference between making a decent return in the stock

market and achieving super performance, and that difference can be life changing. Whether you are an accountant,

a school teacher, a doctor, a lawyer, a plumber, or even broke and unemployed as the author was when he started –

you can attain super performance.

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31

gains like the market’s money instead of their money, and

in due time the market takes it back.

Let us say someone buys a stock at $20 a share. It

climbs to $27. Then the investor decides he can “give it

room” because he has a seven point cushion. Wrong!

Once a stock moves up a decent amount from its purchase

price, Mark Minervini usually gives it less room on the

downside. He goes into a profit protection mode. At the

very least, he protects his breakeven point. He is certainly

not going to let a good gain turn into a loss.

At the end of each trading session, when you review

your portfolio, ask yourself this: Am I bullish on this

position today? If not, why am I holding it? Does your

original reason for going long remain valid? End every

trading day with a frank appraisal of all your positions.

We are not suggesting that you not allow a stock to go

through a normal reaction or pullback in price if you

believe the stock can go much higher.

Of course, you should give stocks some room to

fluctuate, but that leeway has little to do with your past

gain. Evaluate your stocks on the basis of the return

you expect from them in the future versus what you are

risking. Each day, a stock must justify your confidence in

holding it for a greater profit.

Avoid the Big ErrorsRecently, the author had a chance to speak with Itzhak

Ben-David, coauthor of the study “Are Investors Really

» Consistency Wins the RacePeople buy stocks in hopes of

making money and increasing their

wealth. They dream of the great

returns that their carefully chosen

investments will yield in the future.

Before investing your hard-earned

cash, however, you had better think

about how you will avoid losing it.

If there is one thing Mark

Minervini has learned over the

years, it is that risk management is

the most important building block

for achieving consistent success

in the stock market. Notice that we

said “consistent.” Anyone can have

short term success by being in the

right place at the right time, but

consistency is what differentiates

the pros from the amateurs, the

timeless legends from the one hit

wonders.

During his career, the author has witnessed many

people make millions of dollars during good times, only

to give it all back and even go broke. We are going to tell

you how to avoid that fate.

It is Your Money, but Only as Long as You Protect itTo achieve consistent profitability, you must protect

your profits and principal. As a matter of fact, Mr

Minervini does not differentiate between the two. A big

mistake many traders make is to consider trading profits

as house money, acting as if that money somehow is

less their own to lose than their original starting capital

is. If you have fallen into this mental habit, you need

to change your perception immediately to achieve

superperformance.

Let us say the author makes $5,000 on Monday. He

does not consider himself $5,000 “ahead of the game,”

free to risk that amount shooting for the moon. The

account simply has a new starting balance, subject to

the same set of rules as before. Once he makes a profit,

that money belongs to him. Yesterday’s profit is part of

today’s principal.

Do not fall into the faulty reasoning of amateur

gamblers. Through consistent play and conservative

wagering, a player picks up $1,500 at the blackjack table.

Then he starts to make big, reckless bets. In his eyes, he

now is playing with house money. This happens all the

time in the stock market. Amateur investors treat their

The stock of Repligen (RGEN) broke out dynamically in March 2015. Moving the stop to breakeven protects your principal and keeps you with the longer term trend.

Source: www.tradesignalonline.com

F1) strong Breakout trade

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www.tradersonline-mag.com 08.2015

Most investors are simply too slow

in closing out losing positions. As a

result, they hold on until they cannot

take the pain anymore, and that eats

up precious capital and valuable

time. To be successful, you must

keep in mind that the only way you

can continue to operate is to protect

your account from a major setback

or, worse, devastation.

Avoiding large losses is the

single most important factor for

winning big as a speculator. You

cannot control how much a stock

rises, but in most cases, whether

you take a small loss or a big loss

is entirely your choice. There is one

thing we can guarantee: if you cannot

learn to accept small losses, sooner

or later you will take big losses. It is

inevitable.

To master the craft of speculation,

you must face your destructive

capacity; once you understand and acknowledge this

capacity, you can control your destiny and achieve

consistency. You should focus a significant amount

of time and effort on learning how to lose the smallest

amount possible when you are wrong. You must learn to

avoid the big errors.

Practice Does Not Make PerfectMark Minervini knows people who have managed

money on Wall Street for decades yet have only

mediocre results to show for it. You would think that

after all those years of practice their performance

would be stellar or at least would improve over time.

Not necessarily. Practice does not make perfect. In

fact, practice can make performance worse if you are

practicing the wrong things.

When you repeat something over and over, your brain

strengthens the neural pathways that reinforce the action.

The problem is that these pathways will be reinforced for

incorrect actions as well as correct actions. Any pattern

of action repeated continuously will eventually become

habit. Therefore, practice does not make perfect; practice

only makes habitual behaviour.

In other words, the fact that you have been doing

something for a while does not mean you are guaranteed

success. It could be that you are just reinforcing bad

habits. The author subscribes to the advice of legendary

Reluctant to Realise Their Losses? Trading Responses to

Past Returns and the Disposition Effect.” The tendency

to sell winners too soon and to keep losers too long has

been called the disposition effect by economists.

Mr Ben-David and David Hirshleifer studied stock

transactions from more than 77,000 accounts at a large

discount broker from 1990 through 1996 and did a variety

of analyses that had never been done before. They

examined when investors bought individual stocks, when

they sold them, and how much they earned or lost with

each sale.

They also examined when investors were more likely

to buy additional shares of a stock they had previously

purchased. Their results were published in the August

2012 issue of the Review of Financial Studies.

The study highlights several interesting conclusions:

• Investors are more likely to allow a stock to reach a

large loss than they are to allow a stock to attain a

large gain; they hold losers too long and sell winners

too quickly.

• The probability of buying additional shares is greater

for shares that have lost value than it is for shares

that have gained value; investors may readily double

down on their bets when stocks decline in value.

• Investors are more likely to take a small gain than a

small loss.

In November 2014, Mark Minervini bought a questionable “V”-shaped breakout at Alcoa (AA). As the stock did not confirm the breakout but started to go lower, the mistake was recognized and the position closed for a small loss.

Source: www.tradesignalonline.com

F2) Booking a small Loss

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33

football coach Vince Lombardi. As he said, “Practice does

not make perfect. Only perfect practice makes perfect.

In the stock market, practicing wrongly will bring

you the occasional success even if you are using flawed

principles. After all, you could throw darts at a list of

stocks and hit a winner once in a while, but you will not

generate consistent returns and eventually you will lose.

The reason most investors practice incorrectly is

that they refuse to objectively analyse their results to

discover where their approach is going wrong. They

try to forget the losses and keep doing what they have

always done.

The proliferation of cheap brokerage commissions,

Internet trading, and web-based stock market data may

have provided everyone with the same technology, but it did

not grant investors an equal ability to use those resources.

Just as picking up a five iron does not make you Tiger

Woods, opening a brokerage account and sitting in front

of a computer screen does not make you Peter Lynch or

Warren Buffett. That is something you must work for, and

it takes time and practice. What is important is that you

learn how to practice correctly.

Avoid Paper TradingAs new investors learn the ropes, often they engage in

paper trading to practice before putting real money at

risk. Although this sounds reasonable, Mr Minervini is

not a fan of paper trading, and he does not recommend

doing it any longer than absolutely

necessary until you have some

money to invest. Paper trading is

the wrong type of practice. It is like

preparing for a professional boxing

match by only shadow boxing; you

will not know what it is like to get hit

until you enter the ring with a real

opponent.

Paper trading does little to

prepare you for when you are trading

for real and the market delivers a real

punch. Because you are not used to

feeling the emotional as well as the

financial pressure, it is unlikely that

you will make the same decisions you

did in your practice sessions.

Although paper trading may

help you learn your way around the

market, it can also create a false

sense of security and impede your

performance and learning process.

Psychologist Henry L Roediger III, who is the principal

researcher for the department of psychology at Washington

University in St. Louis, conducted an experiment in which

students were divided into two groups to study a natural

history text.

Group A studied the text for four sessions. Group B

studied only once but was tested on the subject three

times. A week later the two groups were tested, and

group B scored 50 per cent higher than group A. This

This buy setup in late February 2015 in Amphastar Pharmaceuticals (AMPH) was emerging from a classic volatility contraction pattern.

Source: www.tradesignalonline.com

F3) textbook sePA© setup

The higher your drawdown, the more difficult it will be to make it back. That is a mathematical reality you should always keep in mind.

Source: www.minervini.com

Loss Gain to Break Even

5% 5.26%

10% 11%

20% 25%

30% 43%

40% 67%

50% 100%

60% 150%

70% 233%

80% 400%

90% 900%

T1) Loss versus Gain Asymmetry

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www.tradersonline-mag.com 08.2015

demonstrates the power of actually doing the thing

you are trying to accomplish versus preparing for it in

simulation.

If you are just starting out, you should trade with

real money as soon as possible. If you are a novice

trader, a good way to gain experience is to trade with an

amount of money that is small enough to lose without

changing your life but large enough that losses are at

least somewhat painful.

Do not fool yourself into a false sense of reality. Get

accustomed to trading for real because that is what you

are going to have to do to make real money.

Commit to an ApproachYou do not need a PhD in math or physics to be successful

in the stock market, just the right knowledge, a good work

ethic, and discipline. The author’s SEPA® methodology

was developed after decades of searching, testing, and

going back to the drawing board countless times to

uncover what actually works.

You, too, will go through your own trial and error

period: window shopping and trying various concepts

and approaches to the stock market, whether value,

growth, fundamental, technical, or some combination.

In the end, to succeed, you will need to settle on

an approach that makes sense to you. Most important,

you must commit to perfecting and refining your

understanding of that methodology and its execution.

A stock trading strategy is like a marriage; if you are

not faithful, you probably will not have a good outcome.

It takes time and dedication, but your objective should

be to become a specialist in your approach to the

market.

Although strategy is important, it is not as critical

as knowledge and the discipline to apply and adhere to

your rules. A trader who really knows the strengths and

weaknesses of his or her strategy can do significantly

better than someone who knows only a little about a

superior strategy. Of course, the ideal situation would be

to know a lot about a great strategy. That should be your

ultimate goal.

Invest in Yourself FirstWhen the author began trading in the early 1980s, he

endured a six-year period when he did not make any

money in stocks. In fact, he had a net loss. It was not

until 1989 that he began to achieve meaningful success.

What kept him going? Unconditional persistence! An

investment in knowledge, which takes time to acquire, is

an investment in yourself, but it requires persistence.

When you make an unshakable commitment to a

way of life, you put yourself way ahead of most others

in the race for success. Why? Because most people

have a natural tendency to overestimate what they can

Title: Trade Like a Stock Market Wizard

Subtitle: How to Achieve Super Performance in Stocks

in Any Market

Author: Mark Minervini

Pages: 352 pages

Publisher: McGraw-Hill (April 2013)

Price: $ 27.00 Hardcover, $ 27.00 Ebook

ISBN: 978-0-07180-722-7

Bibliography

period: window shopping and trying various concepts

and approaches to the stock market, whether value,

In the end, to succeed, you will need to settle on

an approach that makes sense to you. Most important,

you must commit to perfecting and refining your

A stock trading strategy is like a marriage; if you are

not faithful, you probably will not have a good outcome.

It takes time and dedication, but your objective should

in the race for success. Why? Because most people

have a natural tendency to overestimate what they can

You should trade with real moneyas soon as possible.

cover story

35

achieve in the short run and underestimate what they

can accomplish over the long haul. They think they have

made a commitment, but when they run into difficulty,

they lose steam or quit.

Most people get interested in trading but few make

a real commitment. The difference between interest

and commitment is the will not to give up. When you

truly commit to something, you have no alternative but

success. Getting interested will get you started, but

commitment gets you to the finish line.

The first and best investment you can make is an

investment in yourself, a commitment to do what it

takes and to persist. Persistence is more important than

knowledge. You must persevere if you wish to succeed in

anything. Knowledge and skill can be acquired through

study and practice, but nothing great comes to those who

quit.

Expect Some Rotten DaysThe key to success is to become a successful thinker and

then act on those thoughts. That does not mean that all

your ideas and actions will always produce the desired

results. At times you will feel that success is unattainable.

You may even feel like giving up. The author knows. He

has been there. Along the way he had days when he

felt so demoralised by his unsatisfactory results that he

almost threw in the towel and gave up.

However, Mark Minervini knew the power of

persistence. Then, after more than a decade of trial and

error, he was making more money in a single week than

he dreamed of making in a year. He experienced what

the English poet and playwright Robert Browning meant

when he wrote, “A minute’s success pays the failure of

years.”

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.”

Be happy, feel appreciative, and celebrate when you

win. Do not look back with regrets at failures. The past

Mark Minervini

Mark Minervini is one of America’s most successful stock investors. Starting with only a few thousand dollars, he turned his personal trading account into millions. Mark educates traders about his trading methodology through Minervini Private Access, a platform that allows users the unique experience of trading side by side with him in real time.

www.minervini.com

Mark Minervini

Mark Minervini is one of America’s most successful stock investors. Starting with only a few thousand dollars, he turned his personal trading account into millions. Mark educates traders about his trading methodology through Minervini Private Access, a platform that allows users the unique experience of trading side by side with him in real time.

cannot be changed, only learned from. Most important,

never let rotten days make you give up.

ConclusionTo realise profits from investing in stocks, you must make

three correct decisions: what to buy, when to buy, and

when to sell. Not all of your decisions will turn out to be

correct, but they can be intelligent.

It is true that the market is brutal to most of the people

who challenge it. But so is Mount Everest, and that should

not – and does not – stop people from trying to reach the

top. What is expected of a mountain or a market is only

that it has no favourites – that it treats all challengers as

equals.

Trading can be an intellectual stimulation, as well as a

way to make money. Played well, it demands skills of the

highest order, and skills the trader must work very hard

to acquire. A well-conceived and executed transaction

is a thing of beauty, to be experienced, enjoyed, and

remembered. It should have an essence transcending

monetary reward.

The stock market provides the greatest opportunity

on earth for financial reward. It also teaches great lessons

to those who win and those who lose, an education

that goes well beyond trading and investing. Without a

doubt, the stock market gives you incredible exhilaration

when you win and deep humility when you lose. It is the

greatest game on earth. «

Excerpts taken from Trade Like a Stock Market Wizard:

How to Achieve Superperformance in Stocks in any

Market, Copyright 2013 Mark Minervini – published by

McGraw Hill.

Many of life’s failures are people who did not realise how close they were to success when they gave up.

Thomas Edison

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