Note From Kalen: I’ve written before about traders and investors. I consider myself an investor, but I want to let Max, from Ehelpify, show you his side of the game as a trader. I like to give you all types of options with your money, but always do your own research before making an financial endeavor. Enjoy!
I started out in the trading world seven years ago. When I began, I knew nothing about how to invest. My only goal was to create financial freedom for myself and I knew the stock market would be a great opportunity to do so.
So I went on a pursuit while still in college to learn as much as I could. I found a trading course I could do during the evening and this taught me everything I needed to know. I was very lucky to find a great course right at the beginning. What I didn’t know then is how many trading & investing educators out there try and scam people out of their hard earned cash.
I guess it was just beginners luck that I picked a good course at the start.
Upon completing this course and my degree, I’ve had a whirlwind journey over the last few years. My trading story has seen me go through many ups and downs but I’ve learned and continue to learn from my mistakes.
Through trial and error, I created my trading strategy. This is essentially how I approach the market day in day out. It’s how I generate my full time living. There is no secret formula and I haven’t reinvented the wheel here.
I simply found people I admired and learned from what they were doing. I was also fortunate to work in a prop firm at the beginning of my journey so I always had access to really talented individuals. This was crucial for me on my quest for financial independence.
Essentially, my strategy is very similar to William O Neill & Mark Minervini. For those that don’t know them or are not familiar with their work, these two guys are both multi millionaire traders and my thought process was if they have a strategy that works, I’d rather learn that than figure out something that hasn’t been tried and tested over the years.
Besides, their style of trading really suited my own personality. As you develop as a trader, you’ll come to learn the importance of having a strategy that fits with your personality. If you lack patience for example, you obviously aren’t going to be a long term holder of stocks.
So without further ado, let’s dig into how I go about trading and what my strategy is.
I’ve divided it up into three phases.
- The Entry Phase
- The Management Phase
- The Exit Phase
I’ll also included chart illustrations of a typical winning & losing trade so people can get a better idea of how I do things.
*this is for example purposes only and should not be considered investment advice. I do not own any stock mentioned in this post.
1. The Entry Phase
This is the very beginning process for me. There are thousands of stocks and I need to filter it down to specific criteria.
First things first, I look for stocks that meet the C.A.N.S.L.I.M criteria. For those that don’t know, this is essentially finding those stocks that show signs of growth in their fundamentals. You can scan for these stocks for free at Finviz.
Once I have a narrowed list, I will then look at charts of these stocks. What I look for is stocks where the price is in a consolidation.
Then, I need to plan an area where I will buy it and where I will place my stop loss to protect myself if I am wrong.
Let’s take a look at an example below.
In this example, the stock Five Below Inc. met the criteria. It consolidated and broke through the trendline. This was the buying spot, around the $42 mark.
Also, notice the volume increase. This indicates that there are big players stepping into this stock.
Like I mentioned above, there is no need to reinvent the wheel. This is a very common strategy but what separates the successful from the failing trader is discipline to stick to the strategy.
Now for example purposes, we bought the stock Five Below Inc. at $42. What do we do next ?
This leads us on nicely to the next phase.
2. The Trade Management Phase
Right, entering the trade is only 1/3 of the whole process. The next part is how we are going to manage a trade when we are in it.
In this example, my stop would be placed at $38. So that’s $4 per share. One of the biggest hurdles we all can face as traders is where do you place stops and take profits.
Everyone will talk about how to enter a stock but what can we do when we are in?
There is no right or wrong answer and many traders have many different approaches to how they manage their trades.
I use a very simple process. I know what my average results are based on all my statistics over thousands of trades so I will always move my stop to break even when I am up one times my risk.
In the example of Five Below Inc, that means when the price rose to $46, my stop is moved to where I bought it, the $42 mark.
This now means the worst that can happen (with exception to a gap down overnight) I will breakeven on this trade.
Here’s an illustration on the same chart
Now that my stop is at the breakeven point ($42) I simply wait for it to hit my target exit or stop me out. This leads onto the next and final phase.
3. The Exit Phase
We are in the trade, our stop is at breakeven point. Where are our targets?
I have the luxury that I’ve accumulated lots of statistics over many trades so I know on average than my targets should be two and a half times my risk.
In this example it means, my target is 2 and a half times my initial $4 risk so $10 total per share or exit at $52 on this particular example.
Now many of you will see this and wonder why I did not hold. Hindsight is a wonderful thing.
This is what works for me and I have experimented with different ways to exit stocks over the years and this is one of the ways I prefer.
Winning Percentage & Risk/Reward
Some of the greatest traders in the world have a win percentage of 25 – 40%.
Imagine that for a moment, almost 7 of 10 trades can be losers and they still make a handsome living. How can this be achieved?
Simple risk versus reward.
They risk far less when they are wrong and make much more when they are right. Here’s a useful chart to illustrate the power of risk/ reward and why if you have your risk reward in a good place, winning percentage isn’t as important.
Look at how powerful that is. If our reward is 10 times our risk, we only have to be correct 9% of the time to breakeven.
You can clearly see why managing your risk is so important. It’s basic math. This is what I do with my own trading strategy. I am a breakeven trader when I am right only 25% of the time.
One winning trade can more than make up for a multiple of losses. This is where a lot of people who approach the stock market to make money go wrong. They focus solely on the winning percentages and not the relationship between risk ,reward and the percentage.
To sum up, this strategy can be taught to anyone. William O Neill, the creator of it showed this when he trained many people to follow his approach, producing many millionaires in the process.
The difference between success and failure is not the strategy, it’s you as the individual. If you allow a trade or trades to get out of hand, this will effect the end result.
Instead of always wanting to be right in your trades, focus on the risk reward ratios and the rest will take care of itself.
This strategy isn’t American stock market specific. You can trade it on anything from the U.K. to the Asian stock market.
Again, there is no secret formula to the stock market, just hard word and extreme discipline. The very best of luck on your journey if you wish to pursue a trading career.