The 6 Steps to Learning Trading - Full Crash Course

Key Concepts

CAN SLIM: A growth stock investing methodology developed by William J. O'Neil, focusing on identifying stocks with superior fundamental and technical characteristics.
Pivot Point: The ideal buy point for a stock, typically identified on a chart pattern.
Profit Goal: The target selling price for a stock, usually 20-25% above the pivot point.
Capital Protection Sell Rule: A rule to sell a stock if it drops 7-8% from the purchase price to limit losses.
Breakout Failure: A situation where a stock fails to sustain a price increase after breaking through a resistance level, often accompanied by high volume.
Relative Strength: A measure of a stock's price performance compared to the overall market.
Base Formation: Chart patterns (e.g., cup with handle, double bottom) that indicate a period of consolidation before a potential price advance.
Add-on Buys: Purchasing additional shares of a stock that is already performing well to increase the position size.
Certainty Exception: A rare exception to the profit goal rule, allowing a stock to be held past the profit target under specific conditions.
Shakeout Plus Three Buy Point: An early buy point identified after a stock experiences a "shakeout" (a sharp decline) and then rallies $3 (or a percentage equivalent) above the low.
Post Analysis: Reviewing past trades (both winning and losing) to learn from mistakes and improve trading strategies.
Market Factor (M Factor): The overall market trend and its influence on stock performance.
Buy Switch: A personal decision to become invested in the market, often triggered by signs of a market bottom or rally.

Bill O'Neal's CAN SLIM Growth Stock Investing Method

This presentation outlines the Bill O'Neal CAN SLIM growth stock investing method, emphasizing its rule-based nature and its continued effectiveness in modern markets. The presenter, Lee Tanner, a long-time CAN SLIM investor, shares his practical application of the system, including specific rules, examples, and strategies.

Core Principles of CAN SLIM

The CAN SLIM system is presented as a straightforward, rule-based approach to growth stock investing. It involves identifying stocks with:

Top Fundamental Characteristics:
- Current Earnings Per Share (EPS) Growth
- Annual EPS Growth
- New Product, Service, or Management (Something New)
- Supply and Demand (Institutional Sponsorship)
- Leadership Qualities
- Institutional Sponsorship
- Market Direction (Favorable Market)
Strong Technical Characteristics:
- A 30% prior uptrend, indicating institutional accumulation.
- Completion of standard chart bases (e.g., cup with handle, double bottom).

The Six Basic Activities of CAN SLIM Investing

Lee Tanner breaks down the CAN SLIM process into six key activities:

Studying and Learning: Developing written rules is the primary output of this activity.
Making a Watchlist: Identifying potential stocks to buy, considered the most difficult activity.
Buying Just Right: Executing trades precisely at the ideal buy point or early buy points.
Managing a Portfolio: Effectively overseeing a collection of stocks.
Selling Just Right: Adhering strictly to objective sell rules.
Reviewing Periodically: Analyzing trades to learn from experience and refine strategies.

The Effectiveness of CAN SLIM

Despite being publicly known since 1984, the CAN SLIM system remains effective because chart patterns are rooted in human psychology and the laws of supply and demand, which do not change. Institutional investors continue to seek stocks with high earnings growth expectations, making the CAN SLIM criteria relevant.

Resources for Learning CAN SLIM

Books: The first four books by William O'Neil are recommended, followed by books by M.P. Smith on individual investor success.
Investors.com: The Investors.com website and the Investors Business Daily newspaper are tailored towards CAN SLIM investing.

Practical Application and Examples

Buying Just Right: Early Buy Points

A key aspect of Tanner's approach is buying "early" at or before the pivot point. This strategy aims to:

Improve Entry Price: Secure a better price than waiting for breakout volume.
Reduce Risk of Being Shaken Out: By buying lower, a small correction is less likely to trigger a stop-loss.
Facilitate Early Failure Recognition: Allows for quicker identification and exit if a position begins to fail.

Tanner utilizes various early buy points, including:

Trendline Early Buy Points: Buying along a trendline within a handle or base.
Handle High Early Buy Points: Buying at the high of a handle formation.
Shakeout Plus Three Buy Point: A specific strategy detailed later.

He emphasizes using price as the primary trigger for buying, rather than waiting for volume confirmation, as waiting for volume often results in a higher entry price.

Example: Nvidia (January 4, 2024) Nvidia presented a strong CAN SLIM setup with a powerful prior uptrend and a flat base. Tanner identified an ideal buy point around $497 by drawing a trendline on the handle. He would place a broker buy stop with a limit order to secure this early entry, even without immediate volume confirmation.

Portfolio Management

Portfolio Size: Typically 5-7 stocks, with equal position sizing to simplify management and avoid over-concentration.
Add-on Buys: Made to successful positions, with specific rules for scaling in (e.g., 20% of initial position value, 20% of initial share count, or 20% of current position). Tanner prefers the optimistic approach of adding 20% of the current position, but with a rule to scale back or skip add-ons if the price is too close to the last buy price or the profit goal.
Margin Use: Advised for experienced investors, but caution is urged for beginners. Retirement accounts do not allow margin.
Portfolio Risk Management: With a 7-stock portfolio and a 7% capital protection rule, portfolio risk is approximately 1%.

Selling Just Right: Objective Sell Rules

Tanner stresses the importance of objective sell rules to avoid emotional decisions. He has boiled down the 14 basic sell rules into a manageable set, with a focus on:

Capital Protection: Selling at a 7% loss from the purchase price.
Profit Goal: Selling when a stock reaches a 20-25% profit.
Earnings Reports: Specific rules for selling around earnings announcements.
Climb from Peak: Selling when a stock declines a certain percentage from its high.
Trailing Stops: Using a decline from the peak (e.g., 12-14%) or a 10-day moving average as a sell trigger.

He emphasizes checking sell rules daily and making rule changes only during market close on weekends.

Example: Convalt Convalt was bought around $173.50. It failed to break out and plunged below the 50-day line on high volume, triggering a sell rule and resulting in a 2% loss. This demonstrates the effectiveness of sell rules in cutting losses short.

The Market Factor (M Factor)

Tanner advocates for an optimistic bias towards being invested, as the market trends upwards approximately 75% of the time.

Protection in Downturns: Sell rules protect investors if they misread the market and it's going down.
Risk of Underinvestment: Not being invested during market uptrends leads to missed opportunities and unquantified losses.

Example: Market Correction During a significant market correction, Tanner advises against being overly cautious. He advocates for turning the "buy switch" on early, even when news is negative, and using sell rules to exit if positions fail. This allows participation in market rallies.

Shakeout Plus Three Buy Point

This is a favorite early buy point, originating from Jesse Livermore. It involves a double bottom setup where the second low undercuts the first, followed by a rally.

Rule: Buy when the stock price moves $3 above the first low (for stocks between $30-$60).
Adaptation: For stocks over $60, use a 5% increase; for stocks under $30, use a 10% increase.

Example: Netflix (Shakeout Plus Three) Netflix exhibited a shakeout plus three setup during a market correction. Tanner identified a buy point at $89.72 (shakeout plus 5%). Due to an upcoming earnings report and insufficient profit cushion, he would have sold before the report, then potentially bought back in post-market. The stock then rallied to its profit goal.

Example: Robin Hood (Shakeout Plus Three) Robin Hood also presented a shakeout plus three opportunity. Due to early buying and a significant profit cushion (28%), Tanner could hold through the earnings report. The stock later met criteria for the short-term profit extension rule, allowing it to be held past the standard profit goal.

Big Winners and Long-Term Holding

Monster Beverage (Hansen's Natural): This stock is presented as a life-changing example, generating nearly $1 million in profit from a $20,000 initial position over two years. Key factors included:
- Strong CAN SLIM characteristics.
- Early buying and aggressive add-on buys, utilizing margin.
- Holding through bases and applying specific sell rules for long-term gains.
FTI Aviation: This stock provided a 25% gain in eight weeks, demonstrating the effectiveness of buying early and selling at the profit goal. It later set up again, offering another opportunity for a significant gain.
Nvidia (Second Base Breakout): After an initial position, Nvidia triggered the "certainty exception" rule, allowing it to be held past the profit goal. It then formed another base, offering an opportunity to buy a new position and repeat the process.

Key Takeaways and Wisdom

Stick to Your Method: Choose a trading method (like CAN SLIM) and commit to learning and applying it consistently, avoiding the temptation to mix strategies.
Patience is Crucial: The CAN SLIM method requires patience to hold stocks until their profit goals are reached, resisting the urge to swing trade or take premature profits.
Rule-Based Discipline: Strict adherence to written rules for buying, selling, and portfolio management is essential for success.
Learn from Experience: Regularly review trades to identify what works and what doesn't, and use this knowledge to refine your rules and strategies.
Belief in Yourself and the Rules: Develop confidence in your chosen methodology and the rules you've established.
Seek Like-Minded Investors: Connecting with motivated individuals who are also studying CAN SLIM can provide support and shared learning.
Margin Power: For those with a margin account, using margin strategically for add-on buys can significantly amplify gains, but requires careful management and experience.
Relative Strength is Key: During market corrections, focus on stocks that exhibited strong relative strength before, during, and after the downturn, as these often lead the next market rally.
ETFs as an Alternative: In uncertain market conditions, ETFs can serve as a starting point for investment, especially if direct stock opportunities are not yet clear. However, individual stocks often offer greater potential for outsized gains.