Transcription
[Applause]
Couple rules of thumb and a couple comments. First of all, I have no problem holding stocks. I have a problem holding losses. Yeah, exactly. Yeah. If it's, if you have a winner, you know, and you want to hold it for a bigger move, that's fine. But just realize that there's a price to pay. You know, if you're going to go for a big move, you're going to have to go through a lot of pullbacks. And you might be up 20%, and next thing you know, you're, you're not up at all, and you're flat, and you're selling at, you're stopping out at break-even, or maybe even stopping out at a loss. So there's a price to pay.
And then on the flip side, um, you know, if you're, if you're taking the, the short-term profit, you may miss a big move. But, but you, but the stock, of course, you take that profit, and the ones that give back, you're not in. So you have to decide whether what kind of style you are. And to be a hybrid of that, the way I like to do it is I, I take some off the table into strength on the short-term move, and then that finances my risk. I'm, I'm free-rolling the trade, and now I go for a bigger move, and I have nothing but upside, zero downside, and upside. That's, that's the place I want to be. I want to always improve by worst-case scenario.
The other rule of thumb is, and we talk about the technicals versus the fundamentals. So I have a, I have a rule: never buy the story. Never buy the, the numbers without technical confirmation. So I'm never going to buy a stock because it has big earnings without the tech, without the chart, uh, confirming that. So the, the chart has the final say. And that's why we focus on the technicals because without the technicals, it, there's, it's not a buy, regardless of what the fundamentals are.
Now, now here's the next rule of thumb. The next rule of thumb is, if you're going for a longer-term move, well, then you need fundamentals. You're going to need revenue. You're going to need earnings. Because even if you are improving the earnings from say, margin, uh, expansion, cost cutting, productivity enhancement, you're, you're losing operations, things like that, there's only so much you can cut. And then you, you have to have revenue. So a longer-term move is going to require the fundamentals. So you have to keep that in mind. You know, when, and that's why O'Neill would, you know, I asked one time at the Master Trader program, I asked David Ryan, I said, have you ever seen O'Neill buy a stock that, you know, was losing money and had poor fundamentals? He said, I can't remember one ever. Well, HGSI, HGSI in 1999, 2000, one time. That's the only time that I can, exception. One time in a, you know, 50-year career. Yeah, yeah. And everybody who's been, works close to O'Neill would say the same thing, that they can't remember, but maybe a single time that he ever bought a stock. So, and, and that's again, when you're going for the big move, you're going to need the fundamentals to, to come in at some point, and you're going to have to go through pullbacks. And, and yeah, so it's really, you know, you have to decide. I always say, you know, define yourself. What, what are you? Are you a day trader? Are you a swing trader? And if you want to be a hybrid, well, my advice is to get good at one of them first, because it's, it's hard enough to be good at trading any kind of trading, let alone start doing multiple strategies and, and these hybrid crossover, uh, sort of techniques. So it, it takes time to, uh, you know, to be able to blend those.
As far as, you know, reading the chart and whether to hold it for a bigger move or to be patient. Well, maybe the stock's down, but is it really doing anything wrong? You know, is it? And, and so I mentioned the handful of the violations that I look for, particularly after the stock breaks out. Once the stock breaks out, you're at a profit, you can give it a little more leeway, and you may get some heavy selling days, a couple days that you see some heavy volume, heavy selling because the stock has run up and your short-term profit taking. But when that stock first comes out of that base, you're looking for what Livermore called the line of least resistance. When a stock first is in a base, the, the highs there, and that supply is the line of most resistance. And that's why when it tightens up on the right side and that volume comes down, that's giving you an indication that supply has stopped coming to market, and now you are forming the line of least resistance. And that's why they break out so quickly from there. Well, if that indeed is the case, okay, if you have a stock in an uptrend, and there's institutions that are buying that and supporting that stock and eating up the short-term supply, well, that stock should act pretty good from that breakout point. And if it's not, that's where, you know, it's, it's not as, it's not as good of a picture as it maybe appeared, and your timing, you know, might have been wrong. So that takes, that took me 43 years to be able to identify that in real time with my eye, and I still make mistakes all the time. But though that's something that you can, if you read my second book, there's a section on that about confirmations and violations, what is normal, what is abnormal. This is something that David Ryan and I talked about on a daily basis for years when I used to be on Skype with them pretty much every day. And, and, and we, we pretty much, those, when I wrote that book, that was from the conversations that David and I had where our observations and what we found over our career that were, uh, you know, ominous or, or the type of things that we don't want to see, you know, once a stock is breaking out of a base. And what Mark was saying, I think people should go back and, and relisten to the show and listen to what Mark had to say. And the, this, the part about Livermore, you know, I, I think this is why we look at things the same way is, you know, the line of least resistance. And if, if you don't get anything else out of Livermore stuff, it's trying to find out what's normal and natural. And the only way to do that is to look at thousands of charts every day for a long, long time. And then normal and natural just jump out at you, wouldn't you say, Mark?
Yeah, yeah, absolutely. And, and again, yeah, after looking at probably, I've looked at probably five million charts. Yeah. And it, it takes a long time to develop that eye. Uh, but again, as far two things, one, your, you're, you're dead on the money. Livermore is where I came up with this concept of analysis of normal versus abnormal. Livermore said, never be afraid of a stock. Hold a stock if it's acting normal, but be very afraid when it's acting abnormal. And don't fall in love with a stock because it has a big name or some quality when it's not acting right. Um, and, and, and again, just like I said, you know, these stocks like Nvidia, and, you know, you have to remember, there's a tremendous amount of institutional ownership there, which means supply. And when that worm turns, that's where the 50-80 rule comes in, where 50% will go down, 80%, 80% will go down 50% of past leaders that are secular leaders that top. Um, but I just want to talk about buying this camp of buy of not buying breakouts, which I find hysterical.
Yes, thank you. I'm glad someone else says it besides just it's completely ridiculous. You see part of a strategy is for a strategy not to work. I say like the January effect started happening in December, then because people started anticipating it, and then they anticipated the anticipation, and then it happened in November, and before you know it, it's back to January again. Well, that's what happens with stock trading. Breakouts don't work. Okay? And then they don't work. Let's say it's been tougher breakouts for a few years. Guess what happens? People stop, you know, they say, well, what if everybody did it, it wouldn't work? And then they'd stop doing it, and then it would work again. So that, that ebb and flow is part of it. But breakout, the whole concept of that is this randomness. You would think that stocks that are really, uh, priced in or, or, you know, that are the most random and most market type names, like a big mega-cap stock, those would be the ones that would least be, uh, uh, working from, uh, breakout points. Pull up a chart in Nvidia. The breakouts, you couldn't find. And some of these, I mean, you could look at some these mega-caps, breakouts are still working perfectly. Absolutely perfectly. Nvidia came out of two or three bases in this last move that were absolutely textbook perfect. It couldn't be any, any more perfect. And I can show you hundreds of charts like that. Um, so I, I don't know, you know, where it's just this, um, you know, this, this dopamine hit world that we live in now, where it's the instant gratification, and if it's not working, you know, you abandon it immediately. I'm 43 years later, I am doing exactly the same thing as when I start. Well, not when I first started. The first couple of years, I was buying stocks that were $2 stocks trading at 52-week lows, but I, I blew up a few times and realized that wasn't going to work. But then when I changed over to the strategy that I'm using now, uh, uh, in the late 80s, early 90s, I've never done anything different. I just got better at it. I'm doing the same thing over and over and over. And in that time, I, I'm up over 6, 700,000 per, uh, so, and, and it works just as well today as ever. Matter of fact, I think trading now is, is easier than ever. This is, this is the greatest time ever to be a stock trader.
When you get into, you know, where a stock runs up real quick like this, this is what I call time compression. It runs up that right side. It doesn't get a chance to go through that natural, uh, changing of the hands of the weak hands, uh, gobbled up by the strong hands, if you will, and it gets ahead of itself. And you get sometimes when you get sort of a lopsided looking, you know, base like this. Yeah, you can, it'll break out and it'll pull back, and it might stop you out, and it jockeys around a bit, and sometimes it undercuts those lows. Um, but clearly, it's acting very strong. So like Mike said, you know, he's probably, you know, you're probably maybe trying to get in on there, going in there on 129 or something. Maybe, you know, I would add to it on 24 if it doesn't just go. Okay, you back away from it, and you wait. Maybe it shakes out, you take another try. And that's one of the reasons why you want to keep the losses nice and small, because then you can take a, a few stabs at it and get it right. You know, again, keeping those losses small. Um, you want to trade out the losses and hold the gains. That's the whole idea. And that's precisely the opposite of what most do. I just tweeted recently, it was this study that was done. They pulled, uh, uh, tra investors and traders, 77,000 traders, um, at a brokerage firm, and it's interesting. If you go on my Twitter feed, scroll down, it's on there of what the average person, what they, what they did. They held their losses, took their gains, you know, just the opposite of what we're, uh, suggesting here, or, or, uh, um, advising.