Excerpt from our book Trade Like An O'Neil Disciple: It's one thing to learn an investment system with the idea that you should be able to use it to make reasonable profits in the stock market overtime, perhaps having a triple-digit annual gain from time to time, but it's another thing to see how it is all put into practice. It's also interesting to hear how some individuals have made big money in the stock market, achieving unheard of gains in excess of, say, 1, percent in a single year, or some other ridiculous number like 18, percent over seven years.

Most investors, however, have not seen what it looks like from the driver's seat, and when they hear of someone who has produced such performance numbers, it begs the question, "Exactly HOW was that done? By following along with us as we go through the experience of making big gains in the market, you may find that it is not as complicated as you might think.

In the end, it is about working hard to put yourself in the position of being in the right place at the right time; that is, when a leading stock is just starting a huge upside price run. There is skill involved, and there is also some luck, but it is luck that you have to create for yourself by being in the right place at the right time.

Once a position in a big leader has been taken and fully sized within your portfolio, the process becomes even simpler as you think less and sit more. Find the wave, catch the wave,and ride the wave for as long as it will take you. In this manner, investing is a lot like surfing, and when done properly, it can be just as exhilarating. The rest of this chapter and the next will take the reader through periods in our separate trading careers where we made our biggest gains.

Using annotated charts to illustrate what we were experiencing and thinking at the time, we get as close as we can to giving the reader a sense of what it was like to operate in real time during significant bull markets and windows of opportunity and to come away with huge profits that enabled us to achieve financial independence.

When I read William O'Neil's book, How to Make Money inStocks back init revolutionized my way of thinking about the market. O'Neil's hybrid method of applying both fundamental and technical analysis,as well as the "M" in CANSLIM-a technique that enables one to stay on the right side of the market-resonated deeply within me.

So began my journey. From onward, I devoted many hours to the pursuit of making sense of the markets. In these early years, I created all sorts of econometric timing models based on a myriad of economic indicators that seemed to have predictive value. However, I later found that most of these indicators only worked over a period of less than 15 years; thus should markets change, these indicators would lose their ability to predict.

I realized that studying 15 years worth of data was insufficient. I also spent much time poring over individual stock and stock market data so that I could learn what variables and situations drove stocks higher.

In some cases, I worked directly with O'Neil, and took the helm of some of his pet research projects including the Model Book study. Naturally, being his right-hand stock market research man, I shared my research findings with him, sometimes calling him late at night, as he said I could call him any time no matter how late it was if I felt I had made a significant discovery.

Here was someone who clearly shared my passion for the markets. My decision to switch out of nuclear physics into the world of investments had been exactly the right thing to do. I always say once one finds one's true passion in life and takes the necessary steps to make the dream a reality, circumstances tend to align in one's favor. The Model Book project examined top performing stocks from toand to date, I have gone through nearly 20 market cycles going all the way back to the s to study the stocks that made huge gains in each cycle.

I have carefully studied each stock in detail to determine which fundamental and technical variables predicted success with the highest probability, and I came up with a set of variables that the winning stocks shared. I also created and then refined a market direction model, discussed in full in Chapter 7, so that I would be on the right side of the market whether we were in an uptrend or a downtrend. The model has never missed a bull or bear market, and I have used it under fire and in real-time since ,my first successful year in the market.

To ensure the robust nature of the model, I have also spot tested the model in the s ands, which produced results that handily outperformed the leading market averages. I went carefully through each one and charted William O'Neil's buy and sell signals on the market. I saw that O'Neil never missed a bull or bear market. Prudent market timing by moving to the sidelines when the market was weak and buying leading stocks in leading industry groups when the market was in an uptrend resulted in a return of 18, Let's delve deeper by examining each year up close.

I made only minor headway with my personal account PA during the first quarter of as the market was what we might call "sideways" or mostly trendless. Over the years, I have found such trendless, choppy, and sideways markets to be the most challenging because it is easy to get nickeled and dimed as the market whips you in and out, forcing you to take many small losses that begin to add up over time. While getting nickeled and dimed, one must avoid being drawn and quartered.

In mid-March ofI noticed a few high-quality stocks breaking out such as Iomega Corp. IOMshown in Figure 2. IOM had a natural monopoly on portable storage in the form of portable hard drives. They were the first company to effectively market the portability of their hard drives and so enjoyed this first-mover advantage in a space that had little competition at the time.

At the time of the breakout, IOM had a percent increase in earnings to 16 cents per share in its most recent quarter and a percent increase in sales. In the prior quarter of Septemberthey had shown only 3 cents of profit per share so 16 cents represented a huge acceleration into profitability.

Additionally, sales accelerated over the prior 6 quarters from -2 percent, 2 percent, 16 percent, 60 percent, percent,to percent. IOM's base served as a beautiful launch pad for the stock. I put the usual 25 percent of my trading account into IOM on March 18 as it gapped up to new highs, even though very few stocks were still consolidating due to the sideways action in the general market. When buying a stock breaking out of a base, you want the base to have strong, constructive and proper characteristics to help ensure that your stock possesses the best chance of a successful breakout.

I used to carry around a hard copy of. IOM daily chart, breakout Chart courtesy of eSignal, Copyright General market action was a key variable. For example, in a weak, down-trending market, the strongest stocks would often form the left-hand side of what would eventually become a constructive cup-and-handle or double-bottom base.

The strongest stocks act like springs. Once the weight of the market comes off,they spring forward, breaking out of sound bases they had formed during the market correction and doing what they wanted to do all along-go higher. As more leading stocks broke out of sound bases in April, I began to increase the number of positions I had. I quickly found myself on full margin by mid-April, enjoying the rally from late March into June and sitting in my typical 12 to 18 positions.

Incidentally, I've noticed that my trading style in terms of position sizing, number of positions, and risk levels has not changed over the years. It is independent of account size, such that whether I was running a small account in or running big money for Bill O'Neil in onwards, I still tend to hold 12 to 18 positions in any uptrending market.

IOM daily chart, Otherwise, I will sell at least half the position if the stock hits my mental sell alert, or will sell to free up capital for new buys in fundamentally strong and potentially faster stocks breaking out of sound bases. Over the next several days, each stock I owned then began to hit my sell alerts, so I sold. With IOM, I used the day moving average to guide my mental sell alert, as Figure 2.

After IOM peaked on May 22, it sliced through the day moving average on big volume on May That said, it could be argued that a climax top occurred in those three up days on high volume at the peak. Back in ,I did not understand climax tops well enough to sell into them and found that I preferred to sell on weakness instead of strength as it more suited my trading personality. Incidentally, I use the day as a sell guide for the fastest names,as they tend to get support around the 10 day as they move higher.

For slower stocks, or for stocks that trade with more volatility, I use theday moving average as my guide on where to sell. Should the stock penetrate the day, I will then put the stock on standby sell to see whether it should be sold or held.

We cover this selling strategy in detail in Chapter 6. I eventually found myself percent in cash by mid-June. I had no idea the market was going to have a mini-crash but I always stick to my rules. Here is a key but obvious point that ensures that you will not fall in love with your stock and hold it past its prime. Buy based on both fundamentals and technicals, but sell purely on technicals.

Technical action should always be the final judge when selling a stock. The NASDAQ Composite proceeded to drop Many of the high-growth stocks I owned suffered far more severe corrections since such stocks tend to be more volatile.

But I was protected, because I was in cash. The Nasdaq breaks down and trends lower before finding a bottom in July The timing model issues a buy signal on August 1, The market continued its correction until it finally found a bottom in July.

Shortly thereafter my timing model issued a buy signal on August 1,as we see in Figure 2. I also noticed stronger leading names just starting to break out of sound bases, always a good sign as it signals that a potential new bull phase in the market is emerging. Stronger names are often the first to break out, and when this occurs in synchronicity with a buy signal, it is highly constructive. So, listening to these stocks shouting to be bought, I began to buy in earnest once again.

By Decemberone of the big buzzes in the market was the impending year or "Y2K" crisis. Companies that were coming up with solutions to help computer systems to cope with the date change from a"19" prefix to a "20" prefix were garnering interest from investors.

It is one thing to buy into a big story on the basis of the buzz alone, but in this case certain "Y2K" stocks like the year stocks TSR Inc. TSRIZitel Inc. ZITLand Accelerate Inc. ACLY had been discussed at length on how they could avert potential disaster as the clocks ticked over to January 1, I took notice of these stocks, which were the major players in this subsector as they broke out of proper bases.

All it takes is one or two good homeruns in any given year to make up for all the small losses. As a general rule, following the method of buying fundamentally strong stocks at the right pivot points, then moving to cash when the market is weak puts the odds greatly in your favor so that you will achieve that golden percent return in a given year, provided you are in a bull market environment.

If you are in a bearish environment, you still might be able to hit one or two homeruns, which will counteract any small losses. During the first quarter ofthe market was in a downtrend. By April, some portfolio managers with whom I was speaking were ready to throw in the towel for the year as frustration ran high.

I had stayed mostly in cash during this period as my timing model had been on a sell signal, and there were almost no stocks worth buying. Then on April 22, my timing model gave a buy signal, shown in Figure 2. I bought the strongest of stocks, then as futures spread trading pdf rally continued, I would sell the weakest names to make room for any new strong names breaking out.

I was effectively force feeding any kellogg stock marketwatch buying power into the strongest names. The market continued on its uptrend into October. I then was surprised to see that just over a few days, by October 17, most all of my stocks suddenly hit their sell alerts, just a few days before the market imploded.

The massive sell off was caused by the Asian currency crisis,shown in Figure 2. I had no idea this crisis was going to a stock index call option is exercised.

the writer must when it did nor that the market would sell off so hard. But as I had always done before,I sold when my stocks hit their sell alerts. Thus, I was safely in cash a few days before the markets got slammed. My drawdown off the peak was just Incidentally, my success-to-failure rate in was one of forex guam tracking lowest ever, with the number of my losing trades outnumbering my winning trades by roughly 4: Yet I was able to achieve a triple digit return, just barely percent according to my accounting,98 percent according to KPMG because the home runs made all the difference.

I point this out to illustrate that the number of profitable trades is perhaps the least important variable with this investment methodology. The percent gained on a trade is a far more important variable. That said, in other bull market years, my success rate is usually closer to 50 percent. While the first quarter of was highly profitable, the months from July through early October were some of the most challenging.

Shortly after the market peaked in mid-July, my stocks hit their sell alerts so I ended up back in cash just several days after the peak.

The market then staged a feeble rally in September. Very few high-quality stocks were breaking out of sound bases; thus there was little to buy that month. I remember, however, many investors buying that month eager to assume the rally was continuing. But when October came around, the markets sold off very hard, absolutely demoralizing many investors. Many had year-to-date losses by that point. I also noticed a few high-quality stocks breaking out of sound bases in the ensuing days such as eBay Inc.

EBAY was a most interesting IPO. It had one of the best business models and had first-mover advantage in its space much like Yahoo! YHOO for search engines and Amazon. EBAY came public on September 24, but currency converter rupee to singapore dollar its brilliant business model proceeded to lose more than half of its value due to the nasty bear market that caused the NASDAQ to lose So even though EBAY had one of the strongest business models, it sold off hard with the rest of the market, thus neatly illustrating why fundamentals are only half the story.

No matter how great a stock's fundamentals, a serious bear market will usually drag a stock down. When my timing model signalled a buy shortly after the market bottomed, it only took a few days for EBAY to hit its buy alert. On October 26,EBAY gapped up out of what I call a U-pattern or what Gil Morales refers to as an "IPO U-Turn" as we see in Figure 2. These rare U-patterns can be seen in the strongest of stocks.

The stock is so strong that it is not going to wait to form a handle, and the length of the base is often four weeks or less. I bought my first position in EBAY on the gap up, and then bought a second position as the stock bounced off its day moving average. I have how much do medical billing and coder make that the strongest stocks often constructively trade around their day moving average, using it as support to rest briefly before continuing their move higher.

EBAYdaily chart, Meanwhile, many investors had been so demoralized by the brutal bear market stock market timing business cycle began in July and thus were skeptical as the market bounced in October. I remember some stayed short the market into November as the market rose like a rocket. And as the market continued to rally, it forced those who were reluctant to buy, to either cover their short positions or admit their error and start buying.

However, they were late buyers, and so they missed some of the most compelling breakouts. The best stocks are sometimes the first ones to break out shortly after a new uptrend begins as they often offer the best gains.

EBAY was an excellent example of this. The fourth quarter of turned out to be a highly profitable quarter. As the technology sector led the way higher, stocks that had first-mover advantages in their space often well outperformed their peers, making them true market leaders.

Fortucast: Timing and Advisory services for the Financial futures markets

I screened for stocks with top currency pair correlation chart, which included having great business models and then investigated whether any had a first-mover advantage. I then pruned the list further by investigating each stock in detail. Of the few stocks that made the cut, I put mental buy alerts on each, so that when the stock traded through its buy alert, my software would immediately alert me.

The fourth quarter of presented what I call a high-class problem. So many great stocks were breaking out money making guide runescape 2016 f2p sound bases that buying power quickly became exhausted and it became a challenge to figure out which stock or stocks to sell out of my roughly 14 to 17 positions during this period to make room for potentially faster stocks breaking out.

I was then able to force-feed capital into the strongest names at all times while the market was advancing, which gave me a huge edge.

This insured that, being fully on margin, percent of my capital was being deployed strategically. Part of successful investing is knowing when a fundamental part of the market changes, even though the market may have never behaved this way in the past. In the late s, it was the earnings metric. Some Internet stocks that made huge gains had little to no earnings. While earnings are one of the most important variables I use to gauge the potential of a stock, I realized that sales growth was a useful metric for stocks with no earnings.

Understanding the fundamental story behind the stock together with understanding how Wall Street perceived the story behind the stock proved beneficial because it is the institutional money from mutual, hedge, and pension funds that cause a stock to make huge advances.

Because of this fundamental change in the market, I learned that markets sometimes change in subtle and not-so-subtle ways. While certain key fundamental and technical variables continue to work cycle after cycle and form the core of my strategy, other variables have a limited life. It is up to investors to follow the markets closely so they can see when new variables can be used to enhance profits as well as when such variables lose their predictive value.

Be wary of black box methodologies that claim to be forex broker insurance without having to be fine-tuned.

Riding the Big Market Cycles (1/3) - Business & Market cycles

They may work for one or two market cycles but must be forex hunter to keep up with changes in the markets.

In the first quarter ofmost of the stocks that triggered buy alerts were technology stocks since the Internet was touching so many aspects of technology. I noticed many Internet stocks had staged or stock market timing business cycle staging reversals after making huge gains.

Also, the day before, on April 12, some stocks announced they were going to attach ". Some more than doubled in price on the announcement. This extreme buying struck me as some sort of temporary climax top for the Internet group. Then on April 14, before the market opened, I noticed many of the stocks in my portfolio were going to gap slightly down from the prior close they had set the day before.

After the first few minutes of trade, they were unable to rally from their lower opening price. Noticing this and taking into account the prior action that led up to this day, I gave my trader a "shopping list" of stocks to sell just several minutes after the market opened.

This "shopping list" was 14 out of the16 stocks that I held, thus I was effectively reducing my market exposure from percent down to about 35 percent. The CBOE Internet Index Figure2. The CBOE Internet Index overall finished the day down That day, some of the best-performing stocks were down twice the decline in the CBOE Internet Index.

INSP in Figure 2. It took just six days for INSP to get sawed in half, as it fell almost 50 percent from peak to trough. Timing is everything, especially when it comes to handling high octane names. Like dynamite, they must be handled with care, especially if you decide to concentrate your us stock market 1/16/08 in buy apple stock fidelity sector.

Had I not acted quickly when I saw the warning signs, I would have given back a much larger portion of the profits I had made during the first quarter of Being able to sell most of my positions within 20 minutes was also key. I had a rule back then by which I would hold no more than 10 percent. Today, times have changed, so here in the year ,I would put no more than 5 percent of the average daily trade into any one position, and also focus more on the mid-to-larger-cap names that are less subject to noise.

While the first quarter of was a gift, the second and third quarters ofas shown in Figure 2. While the KPMG verification shows my drawdown was about percent, my real drawdown was larger at nearly percent because I was intentionally not trading a sizeable portion of the account that was earmarked for taxes.

Thus, the base of capital I was trading was substantially smaller than what was actually in my account. This resulted in larger drawdowns than reported by KPMG, but also resulted in larger annualized gains than reported by KPMG. Of course, KPMG follows regular accounting standards, so it had no way of accounting for this. At any rate, the high level of volatility in a trendless market exhausted many traders.

It was not until October that the market resumed its uptrend in earnest. I'm glad to say that periods such as the second and third quarters of are rare. That said, it is important to stick with a winning strategy, in good times and bad. I have lived with my strategy since This gave me the confidence to stick with it even during the treacherous second and third quarters of I never lost sleep during this period, nor have I ever lost sleep over the market.

The key is to always understand why one is making or losing money. My timing model sheds much light on the character of the market.

If the model is struggling to make profits, such as it did during the second and third quarters ofit helps me realize that we are in an unusual environment. In this case, the market was both volatile and relatively trendless, the Achilles' heel of trend following. That said, periods of steep drawdowns are part and parcel of trend following.

It is critical to stick with the strategy in both good times and bad. As shown by Dunn, Henry, O'Neil, and other successful trend followers, the profits made during the good times more than make up for the losses during difficult, trendless periods.

Celera Genomics CRAshown in Figure 2. The group continued to make huge price advances in early As with the Internet sector, many of which had no earnings, market perception played an important role in the bio-techs, many of which not only had no earnings but also had no revenues.

So, with none of the classic fundamental variables on which to measure the company, I applied to the biotechnology sector what I had learned about market perception with the Internet sector. This was key to my making a triple-digit return in on the long side, a year when the market averages such as the NASDAQ Composite were down nearly percent.

The biotechnology sector topped in late February, shortly before the general market topped. The general market then put in a top on March 10 as shown in Figure 2. I was quick to take my account off margin and move into cash as each one of my stocks hit its sell alert in the ensuing days.

It is critical not to overtrade, and perhaps it is often best to do nothing, and just sit in cash when the market is not acting right. That said, overtrading is one of the most difficult issues to overcome even for the most seasoned investors.

The market will tempt the trader to jump back in by making things look almost right.

Market Cycles: The Key To Maximum Returns

And most traders would rather remain active than dormant. But it is often best just to sit and do nothing if the market is not acting just right. In my experience, I have observed that this is easier said than done.

Here is another argument for staying on the sidelines if the market is not acting just right. If one only trades 10 optimal buy situations in a given year, and makes an average of 10 percent on each trade, one's entire account would be up percent in that year if one invested one's whole account each time such an optimal buy point arose.

In practice, due to risk management reasons, even if one invested 25 percent of one's account in each trade, one's whole account would still be up about 40 percent for the year. Of course, ample experience is required to know that the odds are greatly on your side, and that there are no guarantees. However, if we take the period of as one example, the latter part of and were just right for buying, and big money could be made during such windows of opportunity. Then in early SeptemberGLD had a perfect set up and gold stocks could be bought, as they correlate highly with GLD.

Of course, there were other picture-perfect plays during these years, giving one further opportunity to do well.

I am not saying this in hindsight but am basing this on my actual profits during these picture-perfect, albeit brief,periods. My mistake was overtrading during the less optimal periods. Incidentally, I noticed that O'Neil does little when the market is not acting right. You can make a fortune just by being long the right stocks at the right times when the window of opportunity is open.

Business Cycle - Video | Investopedia

My market direction model is almost always on a buy signal during such times, and, if not, it has always switched to a buy signal within days after the first few leading stocks break out of sound bases. You can further enhance your performance by learning short selling techniques, which are discussed in Chapter 6. In February, I pyramided a short position in the Powershares QQQ Trust QQQQ. I remember as profits were building, I started calling this my "Modena trade.

I learned that even though I had always wanted to own a Ferrari, I did not buy it because it was not the act of possessing the car that was important. Psychologically, it was the idea that I could easily possess it. So buying it became unnecessary. It brought me greater pleasure to keep the capital on hand to invest in the markets.

As I learned from O'Neil in the years I worked with him, one should never make the market pay for one's luxuries. Then in March, I re-shorted my QQQQ position. I was heavily leveraged on the short side and failed to consider the more likely outcome that the market could bounce big after having sold off so hard. On April 5, the market gapped up fiercely and rallied the rest of the day Figure 2.

I finally closed my position at the end of the day. I lost just over a cool million in one day. Gil Morales came into my office, shook my hand, and told me "that's one hell of a ride," and that he had enjoyed the. The "Modena Trade"goes awry! I really need a drink.

Shouldn't you be celebrating? The rest of was uneventful with just a few losing trades. The window of opportunity was clearly shut, so I stayed mostly on the sidelines as my timing model was usually either on a sell or a neutral signal. The year was also uneventful, and I stayed mostly in cash. I remember many funds closing their doors. While was a massacre, was equally brutal. Few were left standing. Once the NASDAQ Composite was off more than 70 percent, the market seemed to be excessively oversold.

So I decided to take a small position in the QQQQs for a long-term play. I reasoned that the market could go lower but historically, had always resumed a strong rally after being so oversold. This was true after the panic ofafter the Great Depression when the market lost almost 90 percent of its value, and after other serious market setbacks dating back to the nineteenth century.

So was profitable by a hair due to this one trade, which reversed my small losses. My losses had been small because I remained mostly on the sidelines, safely in cash.

That said, I would have been nicely profitable had I shorted indices on any sell signals issued by my timing model.

This was also true in other years. Thus, this bias I had toward staying in cash during bear markets was replaced starting in with the action of shorting major indices on sell signals; was a wake-up call to start shorting the major indices as was a good year for my timing model, as shown in Figure 2. But when accounting for optimization of the follow-through day threshold, which I discuss in Chapter 7, the return increases to The "Slow MotionCrash" of late In working with my model in real time sincethe returns in my personal and institutional accounts were larger because I was buying individual stocks during periods when my model was on a buy signal.

The toughest year for my model wasas it was one of the only two years when the model was down in its entire year run. Its negative return of That year, distribution day clusters often did not lead to a falling market, as the market continued to grind higher.

This may have been due to the many one-time confluences of cross-currents including the end of the housing bubble, the early stages of a breakdown of financials as seen in the XLF index, and the beginning of the recession.

Fortunately, years such as are extremely rare. On balance, my timing model continues to keep me on the right side of the market cycle after cycle. For historical interest, Figure 2. In the current decade, the compressed, sideways markets observed from January to August brought new trading challenges, as shown in Figure 2.

Three years of difficulty. But whatever doesn't kill you makes you stronger. In lateI came up with a major refinement to my strategy, which enabled me to make my initial buy in a stock's base just before it broke out, a method I call buying "in the pocket," which will be discussed in detail in Chapter 6.

Not only does this refinement work today but also worked beautifully in prior s, s, and s markets. Those of you who subscribe to the Gilmo Report will note that we have discussed them in some detail in prior reports ,which can be found at http: This technique will improve your investment performance should the market encounter choppy, sideways action that grinds higher, such as during much of or during windows of opportunity such as the brief uptrends of September to November and September to October Looking back, as the saying goes, if I only had known in the s what I know now, my returns would have been higher.

We are all students of the market, always learning, always optimizing, and hopefully always evolving. It certainly keeps the journey alive and well. Read our free Dr K report on how to optimize your mind and body so you can boost your focus when trading the markets.

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