Good Trading Reads: Part One

Many of us are currently stuck inside our homes under some form of shelter in place order. That makes this time a great opportunity to read up on how to trade and invest. There are many great books on the subject. I will review a number of books in a series of posts in an attempt to direct the new trader toward what I think is solid trading information.

In this post I'll cover a book that I really like: Trade Like a Stock Market Wizard by Mark Minervini. Mr. Minervini is a former U.S. Investing Champion and in the mid to late 1990's strung together a phenomenal five year performance record averaging over 200% per year. One thing that is not clear is whether this level of performance has been maintained over all the years since. It is unlikely because as you manage more and more money maintaining that type of performance becomes more and more difficult. Additionally, if that level of performance was maintained, he would be far and away the richest person on earth. With that said there is no question, Mr. Minervini is a very successful trader with some valuable information.

Now on to the book itself. Trade Like a Stock Market Wizard contains a lot of very good information. Information that can definitely help anyone learn to trade or become a better trader. Much of the book covers a handful areas commonly discussed in other books such as what fundamentals to look at, trading with the trend, basic technical analysis and risk management.

The two things I found particularly interesting are his trend stage analysis and his volatility contraction patterns. The trend stage analysis is the most intriguing. In essence, Minervini says there are four distinct stages in the life cycle of a stock. Stage 1: the consolidation stage; Stage 2: the advancing stage; Stage 3: the topping stage; and Stage 4: the declining stage. In stage 1 you generally watch and wait. Where you want to buy is in stage 2 and ride that trend as long as possible. Get out of the stock during stage 3. If you play the short side, you can do that during stage 4. Then the cycle may repeat for some stocks, but others will not. Those companies will probably leave the market in one fashion or another through bankruptcy or most likely consolidation with another company. Determining what stage the stock is in can be very helpful when it comes to timing purchases and riding trends, regardless of whether you prefer using fundamental analysis or technical analysis as your primary means of finding an investment.

Minervini's volatility contraction pattern is also quite helpful. This pattern occurs when a stock is creating a base, i.e., trending sideways, before resuming an uptrend. The best way I can describe it is during this basing period the stock price will rise then fall back. When it falls back it will fallback to a price that is higher than the prior low. The stock will rise again, then fall back again, this time to a price that is higher than both prior lows. Each time the stock falls back, the price volume will shrink. At a certain point the stock price will break out above the recent high points and continue to move up. There are generally anywhere between 2 and 5 contractions before a breakout.

Of course, nothing works every time. Cyberark recently followed this pattern to perfection. I was ready to buy on good earnings news. But the news was horrible and the stock tanked. Luckily I waited. Nonetheless it appears to be a powerful technique for finding stocks breaking out to new highs.

All in all, I think this is an excellent book with a lot of quality information. It is well worth the read.