How Leos Mikulka Turned 400% Gains Into Lasting Success

Key Concepts

• Position Management: Strategies for managing open trades, including selling into strength, managing winners, and adjusting stops.
• Price Progression: Understanding how price moves and using that knowledge to make trading decisions.
• Supply and Demand: The fundamental economic principles that drive price movements in financial markets.
• Free Rolling: A risk management technique where profits are used to move the stop-loss to break-even or a profitable level, eliminating further risk of loss.
• Stage 2 Uptrend: A phase in stock market analysis characterized by a confirmed upward trend.
• Natural Reaction: A temporary price drop within an uptrend that is not a significant reversal.
• Psychological Levels: Price points (e.g., 100, 500) that often act as resistance or support due to human psychology.
• Change of Character: A shift in a stock's trading behavior, such as a change in how it respects moving averages or its volatility.
• Progressive Exposure: A strategy of gradually increasing position size as a trade moves favorably, while simultaneously managing risk.
• Mental Capital: The psychological and emotional resilience required for trading.

Managing Trades with Price Progression in Mind

This presentation by Leos Makulka, a top performer in the US Investing Championship, focuses on advanced position management, sell rules, and managing winning trades. The core philosophy is to actively manage trades based on price progression, rather than passively letting winners run.

Personal Trading Style and Statistics

• Trading Style: Swing trader with an average holding period of 10-30 days.
• Average Gain: 6-12% (depending on market conditions).
• Average Loss: 3-6%.
• Risk/Reward Ratio: Aiming for 2:1 to 3:1.
• Batting Average: Approximately 50% (ranging from 40% to 60% based on market conditions).
• Key Principles: Quick to reduce positions into strength, tight stops that are quickly moved, and occasional catching of big winners.
• Drawbacks: Potential for losing streaks due to tight stops, but offset by significant gains in favorable market conditions.

Evolution of Trading Approach

Makulka's approach evolved from traditional growth investing principles inspired by William O'Neil's "How to Make Money in Stocks," which often emphasizes buying and holding for extended periods. He found that a more active approach, including trading around positions, reducing into strength, and managing stops, was more effective. Influences include Mark Minervini's focus on improving the worst-case scenario and Lifesa's strategies for fine-tuning.

Understanding Supply and Demand

• Supply: The availability of a security in the market, where sellers are looking to "fill up" the market and are willing to sell at certain prices. High supply with low demand leads to price drops.
• Demand: The desire for a security, where buyers are willing to pay higher prices. High demand with low supply leads to price increases.
• Trading Implications: Identifying areas of high supply (overhead supply) is crucial for anticipating potential resistance and price reversals. Conversely, areas with depleted supply and strong demand offer opportunities for upward price movement.

Identifying Favorable Trading Environments

• Stage 2 Uptrend: The ideal environment for trading, characterized by upward-trending moving averages (200-day, 100-day, 50-day) stacked above each other for at least a month.
• Base Formation: Looking for well-defined bases (consolidation periods) within the uptrend.
• Moving Averages: Using moving averages (e.g., 10-day, 20-day, 50-day, 100-day, 200-day) to gauge trend direction and identify potential support/resistance. A clean uptrend with upward-sloping moving averages is preferred over choppy, sideways action.
• Weekly Charts: Often provide a clearer picture of the long-term trend and potential for stage transitions.

Entry Strategies and Risk Management

• Break of Downtrend: Not attempting to "fish for lows" but waiting for a clear break of a downtrend line.
• Pullback Buys/Low Cheats: Buying during pullbacks to logical support areas, such as previous resistance turning into support, or near moving averages.
• Tight Stops: Starting with very tight stops (e.g., 2%) to allow for multiple attempts if stopped out, as successful subsequent trades can compensate for early losses.
• Front-Running Breakouts: Occasionally attempting to enter slightly before a confirmed breakout to minimize the stop-loss distance, accepting a higher risk of being stopped out.
• Free Rolling: A key risk management technique where profits are used to move the stop-loss to break-even or a profitable level. This can be achieved by:
  • Taking partial profits and moving the stop to break-even.
  • Moving the stop to a level where a portion of the profit is secured, and if stopped out, the loss is significantly reduced.
  • Example: Starting with a 5% stop, if the stock moves up 5% and half the position is sold, moving the stop to break-even means any subsequent stop-out results in no loss.

Managing Trades in an Uptrend

• Initial Entry: Starting with a tight stop (e.g., 2%) and reducing a portion of the position (e.g., 30-40%) into the first resistance or supply area. This allows for moving the stop to less than the initial risk.
• Reducing into Strength: Taking profits on a portion of the position as the stock moves higher, especially into psychological levels or resistance areas.
• Moving Stops: Aggressively moving stops to break-even or into profitable territory as the trade progresses.
• Handling Reversals: If a stock changes character (e.g., starts respecting a longer-term moving average instead of the 10-day EMA), adjusting stop placement accordingly.
• Adding Back: Treating add-on opportunities as new trades with their own risk parameters.
• Post-Analysis: Reviewing trades, especially those where stops were hit prematurely, to identify areas for improvement without drastically changing the core trading rules.

Case Study: Palantir (PLTR)

The presentation uses Palantir as an example to illustrate:

• Entering a trade on a breakout from a compressed base.
• Starting with a tight 2% stop and reducing 30-40% into the first supply area.
• Moving the stop to less than 2% after the initial reduction.
• Getting stopped out, then re-entering on a subsequent pullback buy with a tighter stop.
• Reducing again into strength near the $100 psychological level.
• Getting stopped out at break-even after the stock failed to turn prior resistance into support.
• Waiting for a more defined pivot and re-entering, eventually leading to a profitable trade.
• The importance of volume analysis: higher volume on up moves, decreasing volume on pullbacks.

Case Study: GE (General Electric)

GE is used to demonstrate trading within an uptrend and managing positions:

• Buying a breakout from a base.
• Reducing small portions (10-20%) into strength, especially in early stages.
• Holding a majority of the position to ride the trend.
• Recognizing signs of strength like the David Ryan MVP criteria, which can signal a potential pullback.
• Reducing significantly during natural reactions or pullbacks to the moving averages.
• The importance of understanding the stock's character, such as its respect for the 10-day moving average.
• Adjusting stops to the 20-day moving average if the character changes.
• Reducing into psychological levels like $500.

Case Study: KRMN

KRMN illustrates the drawback of being too tight on stops and getting shaken out prematurely:

• Entering on a breakout from a skewed cup pattern.
• Reducing into resistance and prior to earnings.
• Getting stopped out below the 10-day moving average before a significant move.
• The lesson learned: while tight stops can be beneficial, sometimes waiting for a confirmed close below a moving average might be necessary, or accepting that premature stops can happen with true market leaders.
• Re-entering on alternative buy points (pullback buys) after the stock formed a mini-base, but again getting stopped out due to tight stops.

Factors to Consider in Position Management

• Leaders vs. Laggards: Identifying true market leaders is crucial.
• Market Conditions: Assessing the overall market environment (bullish, bearish, volatile).
• Group/Sector Behavior: The strength and performance of the stock's industry group.
• Market Cycle: Understanding whether the market is in an early, mid, or late stage of a trend.
• Speculative Nature of the Name: Adjusting position size and risk management for smaller-cap, more volatile stocks.
• Fundamentals: While not the primary entry trigger, strong fundamentals can provide conviction to hold a position longer.
• Redeployment Strategy: Having a plan for reinvesting capital from profitable trades or stopped-out positions.
• Mental Capital: Managing psychological stress and avoiding emotional trading.

Key Takeaways and Conclusion

• Perseverance and Process: Trading is a game of perseverance. Stick to your process, analyze your trades, and refine your style.
• Know Your Numbers: Understand your average gain, average loss, and batting average to frame your strategy.
• Improve Your Worst-Case Scenario: Continuously work to minimize your risk and protect profits.
• Progressive Exposure: Gradually increase exposure as trades work in your favor, while managing risk.
• Market Cycle Awareness: Adjust your approach based on the current market cycle, especially after corrections.
• Change of Character: Be observant of shifts in a stock's behavior (moving averages, volatility, volume) and adjust accordingly.
• Position Sizing: Typically aim for 25% of equity per position, but adjust based on risk, market cycle, and stock volatility.
• Sports Analogy: Lessons from sports, particularly defense and goalkeeping, emphasize responsibility, minimizing mistakes, and sticking to a process.
• Avoid FOMO: Resist the urge to chase speculative trades during "ape season" and stick to your mathematical framework.
• Mindset: Develop rigid rules, have a game plan, and avoid emotional trading. Don't trade positions that prevent you from sleeping.
• Focus on Process, Not Just Money: Trust the process and price action rather than solely focusing on short-term monetary gains.
• Magnitude vs. Duration: Understand the difference between high-tech flags (expecting higher risk/reward) and IPOs (patience for longer-term moves).
• Never Give Up: Continue grinding, studying charts, and learning from market cycles.

Makulka emphasizes that trading is more art than science, and finding a style that fits an individual's personality and risk tolerance is paramount. He encourages traders to learn from master traders, tweak their strategies, and continuously refine their approach.