How is it that so many traders and investors lose money in the market, while others—like authors Gil Morales and Chris Kacher—have shown the ability to earn huge returns on investment? As Bill O'Neil himself says, "Human nature being what it is, 90% of the people in the stock market—professionals and amateurs alike—simply haven't done enough homework." Trade Like an O'Neil Disciple: How We Made 18,000% in the Stock Market is your homework. And if you invest in the market, you can expect that there will be a test involving your own money.
The result of years of observation and the subsequent application of the commonsense rules learned, Trade Like an O'Neil Disciple details the small realities that make up the stock market, including:
The importance of a 6–7% automatic stop-loss policy on stock purchases
Sit tight and be right, or "take your profits slowly"
The value of psychological capital, and how mastering your own psychology allows you to operate from a position of strength
Position concentration, and how diversification—"kissing all the babies"—is unnecessary
How timing the market is possible and necessary, despite claims to the contrary by those who can't
Mistakes novices or lazy investors make, such as averaging down or purchasing only cheap stocks
How O'Neil applied historical precedent to box theory to come up with consolidation patterns ("bases"), such as: ascending; cup-with-handle; double-bottom; square box; flat base; and high, tight flag
Using early buy points in the form of "pocket pivots" to gain an advantage in difficult market environments
Using gap ups as buy points to jump on board of some of the most powerful stocks
The finer points of O'Neil-style short-selling techniques
It took years to identify, analyze, catalog, and verify the characteristics of winning stocks for O'Neil to finally perfect his system. Authors Gil Morales and Chris Kacher save you the time and—if you're an investor, money—by bringing together in one comprehensive guide, the commonsense investment philosophies that allow them and you to Trade Like an O'Neil Disciple.
This book is an excellent addition to the CANSLIM literature. To understand this book's place in the grand scheme of trading literature, I have to digress first.
If you have been trading for a few years and have read some of the classic literature on trading (e.g., Market Wizards series), you know that the vast majority of successful traders are trend followers. The objective of trend followers is to capture trends in markets with limited risk. The rules of trading that all trend followers stick to are letting profit run, cutting losses short, and manage risk.
O'Neil is in his core a trend follower. He suggests cutting losses at 7-8% or less. Once he latches onto a big trend, he sits tight with the trend until the trend runs its full course (e.g., his trades in Chrysler, Syntex, Pic `N Save, Amgen, Charles Schwab, AOL, Sun Microsystems, EBAY, and more recently in AAPL). O'Neil also manages risk of his trades by rigorous stock selection, broad market timing, and position sizing.
How good is O'Neil? According to some accounts, O'Neil has an average annul return of over 40% for nearly half a century (1962 - present). That's better than anyone else with such a long-term track record. His numbers are better than those of Warren Buffet's, Peter Lynch's, and even George Soros'. Some have argued that given O'Neil's great rate of return over such a long period, why then isn't he as rich as Buffet or Soros? The answers are: 1. Although O'Neil is indeed very rich (2 Billion plus according to some accounts), O'Neil doesn't put all his capital in the market. 2. O'Neil doesn't trade other people's money, thus he doesn't have the leverage that Buffet and Soros have had. 3. O'Neil started with five thousand dollars, while most other big guns started with a lot more money, either theirs, or other people's money. 4. O'Neil's trading style doesn't allow him to trade multi-billion dollars - imagine selling 1 millions shares of a small stock at the market when your stop loss is hit! So, for whatever reasons, O'Neil is not as rich as Buffet or Soros on paper. But what the dickens does that matter to you? If you are reading this review, chances are you are a small fish, most of you may just want to make a little extra money to supplement your regular salary, some more ambitious may want to make enough money consistently in the market so that you can "trade for a living", and still a few, like myself, strive to "make millions" - So, the fact O'Neil is not as rich as Buffet or Soros shouldn't bother you. Because in your and my league, that is, the league of traders who manage the amount of money ranges from thousands to a few hundred millions, the best long-standing player is William O'Neil.
In stock trading, the most reliable and confirming indicator suggesting lasting power of a leading stock with superior relative strength is that in its same industry group, there are one or more other leading stocks demonstrating similar superior relative strength (remember DRYS, TBSI, and TNH all moved at the same time, then POT, MOS, CF, TRA all moved at the same time, then FSLR, SPWRA, TSL, STP, CSIQ all moved at the same time?). Thus, using this analogy, if a host of traders out of the same group (O'Neil's group, in the broader sense, the trend-following crowd), using largely similar strategies, all achieved superior results, then there must be something special about this group. The only difference is that all the leading stocks will finally top out and become the best shorts while the best traders get better and spawn another crop of superior traders.
Take a look at this long list of some of the best traders spawned by O'Neil's teaching: David Ryan (of Market Wizards fame, 1985, 1986, and 1987 US Investment Champion, with performance numbers of 161%, 160%, and 118% for those 3 years, respectively), Cedd Moses (1991 US Investing Champion, 379%), and Lee Freestone (1991 US Investing Championship, second place, 279%, 1992 US Investing Championship, second place again, 120%, and 1994 US Investing Champion - first place finally, 234%). Rumor has it that Mark Minervini (of Stock Market Wizards fame) also worked for or was [more likely] heavily influenced by O'Neil and David Ryan. According to Jack Schwager, Minervini's average annual compounded return between 1995 and 1999 was 220 percent, including his 155% first place finish in the 1997 US Investing Championship.
Kacher and Morales, the authors of this book, are two more recent outstanding students of O'Neil's. Kacher's performance numbers: from 1996 to 2002, 110% per year for 7 years (could have been much higher had he decided to fully use his available capital, also remember he has included in the two and half years of the great bear market at the beginning of this century). Jil Morales' performance numbers: from 1998 to 2005: 80% per year for 8 years (excellent numbers given that a large chunk of this timeframe falls right into a once-in-a-life time bear market).
So, Kacher and Morales' numbers speak for themselves - they are among the best. They are like the leading stocks from the No 1 industry group! So, their book is a must "long" for any serious trader.
That's why I had placed a pre-order several months ago before the book was published and as soon as pre-orders became being allowed. So far, I have gone through the book only twice, and already liked it. The meat of the book, in my opinion, is Chapter 5 and Chapter 7. Chapter 7 discusses the Dr K's Market Direction Model, which is Kacher's formalization and refinement of O'Neil's concepts of using follow-through days to identify general market (a.k.a, broad market indices, such as the Nasdaq Composite and the S&P 500) bottoms and using cluster of distribution days to identify general market tops. Chapter 5 discusses entry points that are different from, and supplementary to, the classic O'Neil new high breakout of the nine or so O'Neil patterns (e.g., cup and handle, double bottom, flat base, and others). I don't know if these newly introduced "pocket pivot" are indeed very efficacious patterns with superior Risk/Reward ratio and reasonable reliability - but the concept is certainly interesting and one should check them out and back-test them thoroughly before applying these new concepts to his/her own trading. I find the buying-gap-ups entry more useful but once again I need to do more research myself before I can decide if or how I should incorporate it into my trading. I personally find the Dr K's Market Direction Model chapter most interesting, because I have been trying to do the same thing in the past few years. So, this chapter, plus Chapter 2, which Kacher describes how he made 180 times of his capital in 7 years using this model and individual stocks selection, will be most helpful to my evolution as a trader. Given any kind of decent seminar nowadays costs the trader thousands of dollars and more, and any mistakes in the market cost even more, I'd say the book is worth many times over its nominal price.
Of course, the book is not perfect; nothing about the market is perfect because the market is not perfect. I agree with the previous reviewer's (Chandra Sekhar) comment that the writing can be improved. There are some inconsistencies of thoughts. For example, at the beginning of Chapter 7, page 226, the authors say that "while a market direction model may seem like a `timing model', we do not ascribe that term to it, since it does not adequately describe our approach in using such a model. A market direction model, in contrast to a timing model, should be... ". I bet anyone who is reading this would assume that the authors meant to say that market direction model is not equal to market timing model, however, the terms "market direction model" and "timing model" are used interchangeably throughout this Chapter and especially in Chapter 2, where the author would say "my timing model sheds much light on the character of the market" on one page (Page 35), and then one page later say "My market direction model is almost always on a buy signal during such times (Page 37). So, after having perused the relevant sections 3 or 4 times, I still don't know what the difference between "Market Direction Model" and "Timing Model" is. Overall after reading the book, I think they are the same, but the author seems to have especially pointed out they are not identical - I am still confused.
Also, I wish that Kacher could have been more transparent and been less ambiguous about the rules and construction of his market direction model. But I assume that this model is proprietary and its full construction is not intended to be fully disclosed to the public.
In addition, as the previous reviewer (Chandra Sekhar) hinted, Morales' trading of CUBE using a shipload of call options is not something that the readers of this book should aspire to. One of the most confusing aspects of the market is that in it, there are good trades, there are bad trades, there are wining trades, and there are losing trades. And they are not the same thing. A winning trade could be a bad trade. And in the case of Morales's hugely winning 1995 CUBE call options trade that increased his capital by 500% (not 1000% as the previous reviewer said) it was actually a bad trade. Why, because Morales could have lost all his money and would never be able to trade again. So from a long-term survival point of view, this trade is a bad trade, because he obviously overtraded, meaning, had he repeatedly position-sized like that(seems that he betted all his trading capital on that trade), very soon, he would have been wrong and could have lost everything. However, I am glad that Morales survived a potential disaster (partially based on skills, but largely due to luck), developed himself into a more disciplined trader (otherwise either his numbers would be astronomical or he wouldn't be here), and now can share with us his trading experience and techniques.
So, despite the minor flaws mentioned above, all in all it is an excellent book. The book will help traders in general understand how other traders achieve their super performance and help CANSLIM traders in particular gain a deeper understanding of the O'Neil strategy. The authors share with us some techniques that they developed. By going through all the trading examples and trying to grasp the thought processes behind their writing and their trading examples, I've confirmed and validated some ideas that I independently came up with (e.g., there must be more ways to get into a trend than just O'Neil style base breakouts and 50-day MA entry), which are somewhat similar to the authors'. While the various gems throughout the text are valuable, the opportunities this book lends to confirming one's own ideas with the ideas of some of the world's top CANSLIM traders is invaluable.
Product Details :
Hardcover: 384 pages
Publisher: Wiley; 1 edition (August 23, 2010)
Language: English
ISBN-10: 0470616539
ISBN-13: 978-0470616536
Product Dimensions: 6.5 x 1.2 x 9.4 inches
More Details about Trade Like an O'Neil Disciple: How We Made 18,000% in the Stock Market Wiley Trading 1st edition
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