Audio available at the end of this post.
Nuance is important — after all, the devil (and an edge) lies in the detail. Various recent stacks have focused on such details, for topics like:
Through that process, I’m gaining an increasing appreciation for how you can’t look at setups in isolation.
To be clear: I’m all for specialisation. It’s the fastest, most reliable path towards mastery. That said…
Your setup is part of a bigger ecosystem
Phenomena like episodic pivots (EPs), post-earnings-announcement drift (PEAD), breakouts, parabolic setups and pullbacks are all part of the same trading ecosystem.
If you want to understand when your setup is most likely to work, you need to understand where it fits into the broader market cycles.
(We’ll touch on these again later in this stack.)
This is why I also find it useful to occasionally spend time studying traders with a different style to my own, such as Paul Tudor Jones last week:
This can spark ideas that help your own trading. Remember: ‘creativity’ usually doesn’t mean coming up with staggeringly original ideas, but bringing together and adapting others’ ideas to suit your specific needs and tendencies.
Where I come across concepts that overlap with something other top traders are saying, I pay extra attention. Particularly where they trade different strategies, and even more strongly where the same concepts crop up with top performers from another field. That signifies some type of fundamental principle you’d better learn if you want to join their ranks.
Keeping it simple
That said, a lot of the time, trading — and mastery more generally — are about keeping things simple.
More specifically, they’re about executing the simple things well.
In the trading space, Mark Minervini’s name is one of the first to spring to mind for me. I believe he has a knack for explaining profound concepts very simply. That’s how he came up with the volatility contraction pattern (VCP).
Likewise, Mark is big on progressive exposure. The idea that you want to be trading at your largest when you’re trading at your best, and trading at your smallest when you’re trading at your worst.
This is a concept every great trader has internalised. As Stanley Druckenmiller said in his The New Market Wizards interview (emphasis mine):
“I’ve learned many things from [Soros], but perhaps the most significant is that it’s not whether you’re right or wrong that’s important, but how much money you make when you’re right and how much you lose when you’re wrong. […]
“Soros has taught me that when you have tremendous conviction on a trade, you have to go for the jugular.
“It takes courage to be a pig. It takes courage to ride a profit with huge leverage. As far as Soros is concerned, when you’re right on something, you can’t own enough.”
But I believe that Mark coined the term ‘progressive exposure’.
Either way, he frequently highlights the concept’s importance, yet people often do the opposite. They either double down on a losing position, or put on a bigger position straight after a losing position to make back their money quicker.
Needless to say, that rarely ends well.
Today’s stack
Progressive exposure is only one of Mark’s many lessons — the result of decades of experience.
Mark shared many more lessons in his interview with Richard Moglen from April 2021:
Even if you’ve already watched it, this is one of those resources worth rewatching. Lots of wisdom from Mark in here!
The four golden nuggets — simple, but profound — I chose for this stack are:
Chart patterns simply reflect supply and demand
Observe what’s working and adjust accordingly
It’s a market of stocks, not a stock market
Sell when the risk outweighs the reward
1. Chart patterns simply reflect supply and demand
Coming back to the VCP, this isn’t just a chart pattern — it’s something to understand.
Mark developed the VCP when he started to teach, drawing the pattern to explain how price action tightens, regardless of the specific setup — cup and handle, cheat, low cheat, etc.
The idea behind the VCP is that it generalises all these different setups.
How is that possible?
Supply and demand
Chart patterns reflect supply and demand, which is why the same patterns have been recurring for centuries.
As Mark explained in this interview, VCPs are the effect, not the cause. The reason they work is that you’re watching supply and demand form. I’ve previously gone over this for high tight flags with Anthony Shi.
What about a VCP?
What can we observe in the price action above?
Price tightens from left to right
Price gets very tight on the right
Volume dries up as we move further to the right
What does all that tell you?
Supply has stopped coming into the market.
Of course, there are many more nuances to this — if things were this simple, everyone would be banking. Developing an eye for those nuances requires deliberate practice.
But the point is that, due to the lack of supply, the stock is prone to making a sharp, explosive move — up or down.
And if you’re in the right market, looking at a stock the institutions also want?
You could be in a big and fast mover.
2. Observe what’s working and adjust accordingly
Remember the 2021 market? The year Mark won his second US Investing Championship (USIC)?
Mark didn’t trade in a ‘classic’ way, holding breakouts for long periods. It was the wrong market for that type of trading.
Instead, he took a different approach: taking big positions and quickly selling into strength. We’ll talk about selling in more detail later.
First, the bigger point:
The same strategy contains many different tactics
Classic books like Mark’s Wizard and Champion books, and William O’Neil’s How to Make Money in Stocks, cover numerous setups for good reason:
They’re all part of the same strategy.
Mark repeatedly tells people not to strategy hop. In fact, he’s emphatic about people having to commit and sacrifice to achieve greatness.
That said, you can and should deploy multiple different tactics within your strategy.
As an analogy, think about a builder or a carpenter. They need different tools: screwdriver, hammer, drill, etc. That doesn’t mean they’re hopping between jobs — it just reflects the need for different tools (i.e. different tactics) for different parts of the same job.
Coming back to market cycles
VCPs have worked for centuries because they reflect the underlying principles of the market: supply and demand.
Equally, the market will always have cycles. The reason cycles repeat (or at least rhyme) is because they reflect human psychology and behaviour. Skilled traders like Mark understand where they are within the cycle, and adjust their setup choices and sell tactics accordingly.
As they say: there’s nothing new under the sun. Because humans have been driven by the same emotions for millennia.
Mark: “It depends”
Mark said those words a lot during his interview with Richard.
More specifically, it depends on the market (cycle) you’re in.
Famously, Mark has his ‘trend template’. This, however, is just a qualifier — a first, and non-negotiable, criterion for him.
Suppose we’re in a bear market, starting a new bull market. Then Mark would look for the names with the best relative strength:
Near new highs
Held up the most
Rebounded the fastest
Etc.
We see exactly the same thing with Qullamaggie, e.g. during the 19 May 2023 stream.
3. It’s a market of stocks, not a stock market
When Richard asked Mark whether he looks for group moves, the answer was ‘yes and no’.
When you’re just starting to come out of a bear market, the true leaders — called that way because they literally lead — will be gone by the time you get to the group.
As Mark says: “By the time you see the group doing well, the best stocks will be long gone.” I’ve had this problem quite a bit in my trading journey, and the same is probably true for most traders.
Mark himself suffered from this in the 80s and early 90s. He was looking at the market, waiting for the follow-through day. Then, he was looking for the best groups, and only after that did he look for the best stocks within those groups. Consequently, he always missed the leaders, buying them either extended, or just buying laggards.
Mark concluded he had to flip things around:
Stocks
Groups
Market
In other words, Mark lets stocks lead him to the groups. Then, when he sees stocks acting well and groups work, he knows the market is healthy.
This approach was how he started trading leaders, and marked the beginning of his 33,554% return in five years.
As Mark often says: it’s a market of stocks, not a stock market.
4. Sell when the risk outweighs the reward
It also depends on the market as to what selling tactic Mark deploys. Again, in early 2021 (the months leading up to the interview), we saw lots of big bases setting up, and stocks did break out — but they lacked follow-through.
Mark observed this, and adjusted accordingly. He traded with very large size, tightening his stops and expecting to sell his position within the first three days of the breakout, before it failed.
Of course, should he be in the type of market where breakouts rip higher, and he was repeatedly selling early, he’d quickly adjust to that, and hold positions for longer.
But this is the true golden nugget:
(I remember first hearing this in 2021, shortly after the interview was published. It was such a eureka moment.)
It doesn’t matter what happens to the stock after you sell it
As Mark explains, suppose you:
Closed all your winners at a 10% profit;
Always set a 5% stop loss; and
Had a 50% strike rate.
Repeat the above, say, 200 times, and you’d make a lot of money if a very short period.
Mark likens this to a coin flip where you make $2 on heads and lose $1 on tails. Given these metrics, clearly, your goal is to flip that coin as many times as possible. The maths tell you that, over time, you’ll come out ahead.
This is a different mindset to trying to find the optimal place to sell.
Does it exist? Of course. But how will you consistently find it?
You can’t.
That’s not to say you can’t improve your execution by reviewing your trades. But at the end of the day, you can only develop a system for yourself that works for you. You need to decide how you want to “skin the cat”, as Mark puts it.
Mark himself sells when he feels the risk outweighs the reward. As he often says: “Always get odds on your money.”
When to sell into strength vs selling into weakness
When should you use a backstop (to play for a bigger move), like trailing with a key moving average, and when should you sell into strength and roll that money into something else?
Mark suggests looking at your journal. Letting your spreadsheet make its way into your trading.
For instance, if you take 10% profits on average and 5% losses, you can’t use a backstop! Because you’ll end up giving back most of your profits, even if the action is perfectly normal.
(No, past performance doesn’t guarantee future performance. But looking at your own history as a guide is much better than relying on something entirely hypothetical.)
Whereas if you’re up 50%+, and your risk was 5%, you can choose to trail (part of) that position with a moving average.
I think this is incredibly insightful. We hear so much about ‘trading in a way that works for you’, while also ‘trying to catch that one trade that can make your year’.
But I don’t think people spend enough time thinking about the implications of their chosen strategy. The reality of their strategy.
If you like to swing trade — to ‘hear the cash register ring’, as Mark says — you’ve got to get out while the getting’s good. You’re probably not going to catch many home runs, but let 10/20/30% gains compound. As JUNO says: “I’m not looking for a trade to go to the moon, I want my system to go to the moon”.
Other implications are that you’re probably going to place more trades than a longer-term trader. You’re probably also going to end up with a higher strike rate (though that also depends on the tightness of your stops).
Does that inherently have a lower expectancy than a system like, say, Qullamaggie’s or David Ryan’s? Sure.
But if you’re satisfied with the expectancy you can capture, by deploying a system that works for you — one that you find intuitive, and gives you the least amount of stress possible — isn’t that what we’re really looking to get out of the market?
Support my work
Enjoyed this stack? If you’d like to contribute financially to say thank you, please buy me a coffee.
You can also help out by liking, commenting on and/or sharing this stack. They all help spread the word!
Listen to this stack
More content like this
The Trading Resource Hub’s full archive is here.
Very nice post.
Mark has a very good strike rate as well its very hard to even get or maintain 40% as well