Investing Strategies v.2010

Trading Rules

My current 2008 win / loss ratio is horrible and I need to change my investing ways. I’m going to start using the CANSLIM method because it actually makes sense to me. Here are the ways I’m going about it.

1. Look for stocks that are reaching 52 week highs in leading industries.

2. Stocks breaking out of 52 week highs on strong volume.

3. Stocks that have a strong chart pattern, making higher highs and higher lows.

4. Stocks that sell off to the 20 or 50 DMA and then bounce higher on Strong volume.

5. Stocks with consistently strong earnings as well as future growth.

Joshua Hayes from BigWave Trading and Real Money uses the CANSLIM method and is a very successful trader, here are some things he has to say.

The stocks that I buy always have a RS (relative strength to the S&P 500) rating of 70 or higher over the last 12 months. (These data points can be found in Investor’s Business Daily.) That means that these stocks are the top 30% of all stocks in the market based on price performance.

Most of the time, if you check the charts I post here, you will notice a RS rating of 80 or higher. That means I am only dealing with the strongest 20% of the stock market.

I do this because 125 years of stock market research shows that the best and biggest “monster stocks” every year had a RS rating of at least 80. If my stock does not have at least a 70, I won’t even take a second look at it.

Now, of course, the RS line alone does not make a stock a buy or a sell. Only a well-formed chart pattern, with the stock bouncing off the 50-day moving average on heavy volume or breaking out on heavy volume, makes it a buy or sell.

Not only that, but that base must be formed near the stock’s previous 52-week highs. I prefer this, as it means that once the stock breaks out, there will be no overhead resistance and hence no sellers waiting to unload at higher levels.

IBD’s 125 years of stock market research on the greatest stock winners — I have confirmed the research — has proved that buying stocks hitting fresh 52-week highs (this is the key here; not the 100th time on the list) outperform fresh 52-week lows. This is why I always focus on the best leading stocks that are within 20% of previous 52-week highs.

For me, when it comes to the fundamentals , it is all about annual EPS growth, quarterly EPS growth, quarterly sales growth, ROE , profit margin , debt, mutual fund ownership and cash flow .

But along with good fundamentals, I want the stock to be within 20% of a new 52-week high, under very heavy accumulation, and forming and breaking out of a base of at least five weeks long (and preferably seven weeks) before actually making the purchase.

When everything lines up fundamentally and technically , there is only one more test: Is the general stock market in an uptrend or downtrend? If it’s in an uptrend, then it is safe to invest. If not, knowing that three out of four stocks follow the market, the long should probably not be taken. That is, unless it is in a leading industry group — the top 20% of groups based on price performance from IBD.

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