How To Trade Using CANSLIM | CANSLIM Growth Stock Investing and Trading System

Name: How To Trade Using CANSLIM | CANSLIM Growth Stock Investing and Trading System
Uploaded: 2021-03-18T21:11:12.000Z
Duration: 2 h 46 min 20 s

Introduction to CAN SLIM Investing System

In this section, the speaker introduces the CAN SLIM investing system and provides an overview of what will be covered in the presentation.

Background of the Speaker

The speaker is a mechanical engineering graduate pursuing his master's degree.

He started learning about stock market investing through a class on technical analysis taught by Dr. Eric Wish.

He has interviewed experienced traders who follow the CAN SLIM methodology on his YouTube channel.

Benefits of Individual Stocks vs Index ETFs

The top-performing stocks of 2020 had incredible gains, such as Tesla up 743% and Fiber up 730%.

Individual stocks have higher potential for growth than index ETFs.

Index ETFs provide diversification and lower risk compared to individual stocks.

Overview of CAN SLIM Methodology

In this section, the speaker provides an overview of William O'Neil's CAN SLIM methodology.

Fundamental Analysis

C: Current earnings per share (EPS) should be increasing by at least 25% over the past three quarters.

A: Annual earnings should increase by at least 25% in each of the past three years.

N: New products, management, or other factors that could cause increased demand for the company's products or services.

Technical Analysis

S: Supply and demand - look for stocks with increasing demand and decreasing supply

L: Leader or laggard? Look for leading companies in leading industries

I: Institutional sponsorship - look for companies with support from institutional investors

M: Market direction - invest when market is in confirmed uptrend

Examples of CAN SLIM Methodology in Action

In this section, the speaker provides examples of how the CAN SLIM methodology can be applied to stock analysis.

Apple Stock Analysis

Apple's chart shows a cup with handle pattern, which is a bullish sign.

The company has strong earnings growth and institutional support.

The speaker recommends buying the stock at $125.49.

Zoom Video Communications Stock Analysis

Zoom's chart shows a double bottom pattern, which is a bullish sign.

The company has strong earnings growth and institutional support.

The speaker recommends buying the stock at $478.84.

Conclusion and Disclaimer

In this section, the speaker concludes the presentation and provides a disclaimer.

Conclusion

Investing in individual stocks can provide higher potential for growth than index ETFs.

The CAN SLIM methodology combines fundamental and technical analysis to identify leading companies in leading industries.

Disclaimer

Investing in the stock market involves significant risk of loss.

Consult a financial advisor before investing.

Can Slim Methodology

The speaker discusses the Can Slim methodology and how it can help investors achieve incredible returns by catching a few moves. They also discuss the level of risk involved in this approach and how it may vary depending on age and investment goals.

Individual Stocks vs Index ETFs

The Can Slim methodology allows investors to focus on individual stocks that have the potential for high returns.

Investors should consider their age and investment goals when deciding between individual stocks and index ETFs.

A mixture of both techniques is likely the best approach, with 20% of the portfolio in gross stocks and more volatile instruments, while 80% is in dividends index funds or other passive approaches.

Active management takes more time, especially if you're working full-time, but it's manageable if you commit a few hours on weekends.

William O'Neil's Study

William O'Neil studied the greatest performing stocks going back to the 1800s to identify common characteristics before and during their large increases.

The result of his study is the Can Slim methodology, which stands for different characteristics that successful stocks share.

How to Make Money in Stocks

"How to Make Money in Stocks" is a great book to read even if you're not interested in Can Slim. It provides ideas for expanding your knowledge about investing.

Introduction to the CANSLIM Methodology

In this section, the speaker introduces the CANSLIM methodology and explains how it combines different aspects of investing to achieve the best results.

The CANSLIM Methodology

The CANSLIM methodology is an acronym that stands for Current earnings, Annual earnings, New products or services, Supply and demand, Leader vs. laggard, Institutional sponsorship, and Market direction.

The approach combines fundamental analysis with technical analysis to identify stocks with strong growth potential.

Studies have shown that the CANSLIM methodology has been effective in generating returns of 30.86% over several years.

While the methodology is proven, it still requires individual adaptation to fit one's own time frame and lifestyle.

Importance of Owning Your Investments

In this section, the speaker emphasizes the importance of owning your investments and not blindly following others' recommendations.

Owning Your Investments

It's important to take ownership of each dollar spent on buying and investing in a stock.

Don't buy a stock just because it's popular on social media or message boards.

Any stock you buy should be thoroughly researched and confidently owned.

Surviving Market Corrections with CANSLIM

In this section, the speaker discusses how CANSLIM can help investors survive market corrections.

Surviving Market Corrections

During market corrections like the dot-com bubble burst, William O'Neil was in cash for most of that time as he noticed technical signals indicating a decline in market leaders.

CANSLIM is about being in the market when the environment is right for your style, not being in all the time like index funds and more passive styles.

CANSLIM allows for more active management of money and protection of mental and financial capital.

The CANSLIM Methodology Explained

In this section, the speaker explains each component of the CANSLIM methodology.

The Components of CANSLIM

Current earnings, annual earnings, new products or services, supply and demand, leader vs. laggard, institutional sponsorship, and market direction are all important components of the methodology.

Fundamental analysis is combined with technical analysis to identify stocks with strong growth potential.

Institutional sponsorship indicates that large investors are buying into a stock, which can be a positive sign for its future performance.

Understanding Earnings Growth and Stock Prices

In this section, the speaker explains how to evaluate a company's earnings growth and stock prices.

Key Points:

The first letter in CANSLIM stands for current quarterly earnings and stock prices in general trend with earnings growth.

Sales growth and margin should support earnings growth. If sales are down while earnings are up, it may indicate that the process used to increase earnings is not sustainable.

Ideally, you want to see earnings growth over 50-100% supported by sales growth over 75-50% and improving margins.

Example of Strong Earnings Growth

In this section, the speaker provides an example of a company with strong earnings growth.

Key Points:

Digital Turbine had explosive earnings growth (67%, 160%, 200%, 320%) in 2020 due to accelerating sales and improving margins.

This led to a dramatic increase in the stock price from under $10 to near $100 at one point.

When Demand Gets Pulled Forward

In this section, the speaker discusses what happens when demand gets pulled forward.

Key Points:

Companies that benefited tremendously from pulled-forward demand may have experienced massive explosive growth but their future growth may slow down.

To sell a stock using CANSLIM, technical indicators must break even key moving averages and drop on high volume, indicating a change in trend.

Retail investors should ride the trend of big funds and institutions who have better research capabilities. If they start selling stock, it's a sign to sell as well.

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Technical Analysis and Annual Earnings

In this section, the speaker discusses how technical analysis and annual earnings can be used to determine if a company's growth is sustainable.

Technical Analysis

Technical analysis can help determine if a trend is sustainable or just accelerated.

Fintech and e-commerce trends are expected to continue.

Annual Earnings

Institutions look for consistent and significant annual earnings growth.

Look for at least 25 annual earnings in the past three years.

Watch for breakout years with significant annual estimates and increases in annual earnings.

Zoom had a breakout year in 2020 and 2021, but current estimates show slower growth.

Fiverr has great estimates for 2022 indicating continued growth.

Nvidia is a more steady grower with steady earnings growth that institutions love to see.

New Products, Services, and Management

In this section, the speaker discusses how new products, services, or management can turn around a company.

New Products/Services/Management

Innovation leads to growth fueled by new products/services or even a new CEO.

AMD got turned around because of its new CEO leading to an increase in stock price from under $10/share to near $80/share now.

New Highs

Every stock that goes from $100/share to $1,000/share has to make a new high every single dollar along the way.

Buying new highs is often just the start of a major uptrend.

Amazon

Amazon had a great spot to buy when it broke out to new multipliers during its IPO due diligence phase.

Understanding Breakouts

In this section, the speaker discusses how all-time highs are where big money is made and explains why breakouts to new highs are bullish.

Breakouts to New Highs

All-time highs are where the big money is made.

Breakouts to new highs can be scary because of past market crashes, but they can also lead to significant gains.

A breakout to new highs signifies a change in balance between buying and selling pressure, indicating that buyers and institutions are in control.

When a stock breaks out to new highs, there is no one waiting to sell at that level, which means that any shorts who are holding will have to cover their positions, adding more buying pressure.

Revenue Growth vs. Profits

In this section, the speaker talks about how revenue growth is more important than profits for many growth companies.

Revenue Growth vs. Profits

For many growth companies, revenue growth is more important than profits.

As long as revenue growth is strong, share prices can continue going up even if the company isn't profitable yet.

Consolidation on the right side of a base indicates supply coming from people who sold to break even while institutions hold onto shares for long-term growth potential.

The Impact of QE on Markets

In this section, the speaker discusses the impact of quantitative easing (QE) on markets and how it has helped spur growth.

Quantitative Easing (QE)

QE has a significant impact on markets and can help spur growth.

The Fed turned on QE quickly in March 2020, which helped prevent a more devastating economic situation.

Adding trillions of dollars to the national debt is not ideal, but it was necessary to prevent millions of people from losing their jobs and to allow companies to continue growing.

Synchronized forces behind vaccine development were also necessary for the fast development of vaccines.

Making Money in the Market

In this section, the speaker emphasizes that following trends and technical analysis is more important than trying to predict what will happen in the market.

Making Money in the Market

Following trends and technical analysis is more important than trying to predict what will happen in the market.

Avoid making predictions.

Netflix's Life Cycle

In this section, the speaker discusses the three different phases of Netflix's life cycle and how they affected the company's growth and earnings.

Netflix's Three Phases

The first phase was driven by the DVD rental system, which led to a more than double in a very short amount of time.

The second phase was characterized by innovation and disruption through online streaming, which drove significant growth in earnings.

The third phase involved launching original content such as House of Cards, which spurred another huge run in stock price.

Supply and Demand Characteristics

In this section, the speaker talks about supply and demand characteristics that indicate when it is a good time to enter a stock.

Signs of Winning Characteristics

Strong increases on volume are signs that big institutions are driving the current move.

Gap ups on volume based on earnings are also positive indicators.

Stocks near 52-week highs show that buyers overall are in control of the stock price.

Buying Near 52 Week Highs

Contrary to popular belief, buying stocks near their 52-week high can be beneficial as it indicates buyers have pushed up the stock price.

Example Trade

The speaker bought NEO on breakout days during its run.

Understanding the CANSLIM Methodology

In this section, the speaker explains the CANSLIM methodology and its importance in stock selection.

Tight Price Action

Looking for tight price action is a sign of institutional accumulation.

Institutional accumulation is important for long-term growth.

All-time highs are not a barrier to further growth.

Leader vs Laggard

Focusing on leadership stocks in top 40 industry groups defined by IBD.

37% of a stock's price movement is directly tied to the performance of the industry group it's in.

The overall sector accounts for another 12% of a stock's price movement.

Institutional Sponsorship

Long-term growth is spurred by institutional accumulation.

Increase in fund ownership as well as total amount of shares owned by longer-term holders drives long-term growth.

High-quality fund ownership is important.

Market Direction

75% of stocks follow market trends.

Key moving averages can differentiate between uptrends and downtrends.

Accumulation distribution signs are important.

Understanding CAN SLIM Fundamentals

In this section, the speaker discusses the fundamental principles of CAN SLIM investing strategy.

Key Characteristics of a Good Stock

The stock should be in a leading industry group or sector with personal tailwinds.

The company should have stellar earnings growth, sales growth, margins growth, and large annual earnings and estimates.

The stock should have good supply and demand characteristics, near all-time highs within a strong market.

Avoiding Poor Stocks

Avoid stocks that break the 200-day moving average when it starts curling downwards. This is an indication that the market is not right and needs healing before getting back in.

Avoid investing in banks, mining stocks, or oilers as they are not usually big trending stocks.

Applying CAN SLIM Strategy

In this section, the speaker discusses how to apply CAN SLIM strategy to identify potential investment opportunities.

Identifying Growth Companies

Look for companies with revolutionary products and services that are disruptors in their industry.

Identify companies with fast-growing earnings and sales growth rates.

Follow leading industry groups and sectors to identify potential investment opportunities.

Technical Analysis

Use key moving averages such as 21 EMA, 40-week MA, and 200-day MA to determine trends in stock prices.

Use technical analysis to identify potential entry and exit points for trades.

Responding to Market Changes

Be aware of market changes and follow the rotation of stocks.

Stick with big growth leaders, even if there is some rotation in the market.

Discussion on Value Stocks and ESG Investing

In this section, the speaker discusses value stocks and ESG investing in relation to CAN SLIM strategy.

Value Stocks

Some value stocks may have significant moves, but they are not usually big trending stocks.

Follow leading industry groups and sectors to identify potential investment opportunities.

ESG Investing

CAN SLIM strategy tends to avoid companies that do not have huge growth and earnings estimates such as energy companies.

Avoid investing in oilers or mining stocks as they are not usually big trending stocks.

IBD Stock Screener and Technical Analysis

In this section, the speaker discusses the IBD stock screener and technical analysis.

IBD Stock Screener

The IBD stock screener is available with a digital subscription.

It allows users to screen for stocks based on various criteria such as minimum RS rating, price action, last quarter sales growth, earnings growth, and estimates for the current year.

The speaker recommends using a minimum RS rating of 85 and a price greater than $10.

The screener can help identify potential big winning stocks.

Technical Analysis

Technical analysis involves managing positions and buying/selling stocks based on supply and demand characteristics.

The speaker recommends entering when supply and demand characteristics are in favor, with little overhead supply.

A long-term uptrend is important, with an increasing 200-day moving average being a good sign.

Accumulation signs such as large up volume days, large earning gap ups, tight price action on low volume relative shunt signs, and trending above key moving averages are all things to look for when deciding whether a stock chart looks good.

Buy Points

Breakouts

Stocks should be in a longer-term uptrend before considering buying them during breakouts.

A cup-and-handle base is not considered constructive if it's just the start of an uptrend.

Longer term uptrends lead to continuation once the stock makes it back to all-time highs.

Pullbacks

Buying pullbacks within an uptrend can be profitable.

Overall, investors should focus on identifying stocks that meet their criteria through screening tools like the IBD stock screener while also paying attention to technical analysis indicators like accumulation signs. When considering buy points, investors should look for longer-term uptrends before making any decisions.

Importance of Institutions in Stock Market Trends

In this section, the speaker emphasizes the importance of institutions in driving stock market trends and explains why it is crucial for them to buy stocks.

Institutions Driving Market Trends

Institutions are responsible for driving stock market trends.

Retail traders cannot move markets for an extended period of time.

The goal is to have uptrends that last a few weeks, months, or even years.

It is important for institutions to be behind the move and buying stock.

Signs of Institutional Support

A breakout on huge volume indicates institutional support.

Base types such as cup and handle, double bottom, and flat base indicate consolidation patterns that can lead to breakouts.

Buying as close to the pivot price as possible protects against losses if the stock pulls back.

Managing Volatility in High Growth Stocks

This section discusses how to manage volatility in high growth stocks during choppy trading periods.

Dealing with Choppy Trading Periods

Recent days have been very choppy with high volatility in some high growth stocks like Peloton and Lemonade.

Mohawk was down 8-9% at one point but ended up closing up 5-6% for the day.

Managing Volatility

When dealing with volatile stocks during choppy trading periods, it's important to stay calm and not panic sell.

Keep an eye on key levels such as support and resistance levels.

Use stop-loss orders to limit potential losses.

Managing Risk in Volatile Stocks

In this section, the speaker discusses how to manage risk when trading volatile stocks.

Positioning in Volatile Stocks

The speaker tries to avoid stocks that are too volatile because it's hard to manage risk.

Stop loss is usually placed at the low of the day or low of the previous day.

If stop loss is too far away, either size down or trade a half position versus a full position.

Speaker prefers not to position at all in a stock with very volatile price action.

Pullback to Key Moving Average

A pullback to a key moving average or prior pivot is a significant level of interest for buying.

The pullback should be on below-average volume and not a sign of institutional distribution.

Slow drift back into key moving averages after true breakout presents highest probability setups for starting or adding positions.

Managing Risk and Performance

In this section, the speaker emphasizes the importance of managing risk and its impact on performance.

Importance of Cutting Losses

Managing risk is focus number one for traders.

Cut losses as much as possible because it keeps you in the game as a trader.

Speaker wants to see much less than an 8% loss because performance is a function of batting average, average gain on winners, and average loss on losers.

Minimizing losses will improve gains.

Cut Losses Ruthlessly and Let Winners Trend

In this section, the speaker emphasizes the importance of cutting losses quickly to avoid significant losses. They also discuss how keeping losses small can help traders stay mentally in the game and not be afraid to try a stock again.

Cut Losses Quickly

Losers should be cut ruthlessly to avoid significant losses.

Keeping losses tight means it's easy to get them back in that stock or another stock.

Just because a stock stops you out once doesn't mean it's not a good stock; it just didn't work out that time.

Keep Losses Small

Keeping those losses small keeps you mentally in the game because you're not afraid to try the stock again.

You want to cut your losers about two to three times your average loss.

If you average 10 gains and have a 40 batting average, you won't be a profitable trader if you let those losers go down 10 because the math just doesn't work.

Let Winners Trend

The key is to cut losers ruthlessly and let winners trend.

Ideally, in great market conditions like we saw in 2020, you'll be right a lot more than four out of ten times, which will increase your performance significantly.

When To Sell Stocks

In this section, the speaker discusses when to sell stocks and how waiting for a changing character in the stock can help traders make better decisions.

Wait for a Changing Character in the Stock

When you're at a profit, it's hard to sell that position and realize those gains.

Wait for a changing character in the stock, such as breaking key moving averages or high volume pullbacks.

Trading Strategies

In this section, the speaker discusses trading strategies for swing traders.

Selling Strategies

Swing traders can sell at 20% gains if their losses are 10-8%. This strategy consistently builds an account.

Another selling strategy is to sell when a stock is a certain percentage over a moving average. For example, when a stock is 20% above its 10-day moving average, it always pulls back and either pulls back to a key moving average or forms a base. This could be assigned to kind of sell half of your position and buy the rest for the longer-term move.

When stocks have white and loose price action, especially after it's already up 200-300%, that's a sign that the character is changing in the stock. It's best to either sell your hands or look for stocks that are just starting their up trends.

Technical Analysis

The speaker buys on technicals with CANSLIM and sells only on technicals.

He will sell most of his position when it breaks the 21-day moving average.

If you're more of an investor, you can use longer-term moving averages like the 50 or even the 200.

You can stagger your cells so you're riding a portion for the bigger move while also making sure you're not giving too much back by selling when the short-term character changes.

Case Studies

In this section, the speaker discusses case studies related to Teledoc.

Teledoc Case Study

Teledoc broke out on low volume to a neutral time high and then pulled back really close below the 21 with very poor closing range on higher volume. That's when he sold his last position.

It fell back into the prior base on a large volume, another huge red flag. If you're still in the stock at that point, it's best to sell and move on and wait for it to set up again if you want to get involved again.

Understanding Stock Trends

In this section, the speaker discusses how institutions buy shares and bid up stock prices. They also talk about the opportunities presented by short-term bases and increasing fund ownership.

Institutions Buying Shares

Institutions are buying shares, which is indicated by high volume.

The highest volume ever was seen in APPS when it was down to $10.

Opportunities Presented by Short-Term Bases

There are many opportunities to get into a stock through short-term bases.

A breakout from a short-term shelf can be a good entry point.

Increasing fund ownership from 43 funds to almost 400 presents an opportunity for investors.

Studying Stocks Based on Rules

It's important to study stocks based on your rules.

Look at where you would get in based on your rules.

Study APPS as an example of a great stock to go back and study bar by bar.

Analyzing Stock Price Structures

In this section, the speaker talks about analyzing stock price structures and how volatility affects decision-making.

Volatility and Character Change

The volatility of a stock can affect decision-making.

Wide and loose previous big winners may not look proper anymore due to character change.

Peloton is an example of character change with its improper action.

Proper Action and Price Structures

Proper action is important when analyzing stocks.

The 200-day moving average is often used as support for buying along there.

A stage one consolidation can be a good entry point for investors.

Trading Strategies for Strong Uptrends

In this section, the speaker discusses their trading strategies for strong uptrends and fundamentally ranked stocks.

Short-Term Consolidations in Strong Uptrends

The speaker's trading strategy involves buying short-term consolidations within very strong uptrends.

The big money is made when the stock is trending above the 21 and 50-day moving averages.

Bottom fishing is not the speaker's style.

Trade Desk Example

The Trade Desk is an example of a stock that was trending beautifully but had a little bit of a pullback.

A short-term consolidation against the 50-day moving average can be a good entry point for investors.

The Importance of Following Rules and Stop Losses

In this section, the speaker emphasizes the importance of following rules and stop losses to protect one's account from significant drops.

Key Points:

The speaker avoided a drop to the 200-day by following rules and stop losses.

Following rules and stop losses protects accounts from significant drops that can be detrimental to compounding.

The speaker has been actively managing their positions by putting test trades on stocks like Snapchat and Bumble.

When establishing positions, it is harder to let natural fluctuations play out, but having a clear mind allows for buying back when they tighten up again.

Tesla: A Previous Winner

In this section, the speaker discusses Tesla as a previous winner in the stock market.

Key Points:

Tesla had a strong uptrend after an earnings gap up on huge volume in 2019.

Previous winners are great places to look for new opportunities if they set up right with price and volume supply and demand characteristics.

After falling back to the 50-day moving average, Tesla has moved through it but is still basing. It is potentially ready to challenge all-time highs once it develops the right side of its base.

Rates, Zoom, DocuSign and Crypto: A Technical Analysis Perspective

In this video, the speaker discusses technical analysis of stocks such as rates, zoom and docu sign. He also answers questions about applying technical analysis to crypto.

Rates

The speaker suggests that he looks at price action to make decisions on whether to stay out of a stock or not.

Institutions have their plan and they're either going to sell or accumulate stock depending on what the macro conditions are.

The speaker uses charts to read price action and make decisions based off that.

Zoom

During a correction, Zoom was making relative strength highs which indicated something special was happening.

It was volatile but showed signs early on.

The speaker bought it when it reclaimed the 50 here but sold it later.

This is a textbook example of RS great earnings with huge fund ownership growth fidelity contra funds in this.

DocuSign

William O'Neil's methodology is discussed in relation to DocuSign.

There is a video walk-through available for those interested in analyzing buy points, sell points and character changes for winning stocks from 2020.

Crypto

The speaker answers a question about applying technical analysis to crypto.

He suggests that he has been able to do something like that with crypto even though there's no revenue or earnings growth coming in.

Trading Crypto and Related Companies

In this section, the speaker talks about his experience with trading crypto and related companies. He mentions that he is not very knowledgeable about crypto but has traded Silvergate, which manages transactions for different cryptos.

Trading Crypto

The speaker mentions that anything traded on the markets follows supply and demand.

Technical analysis can be used to trade crypto, as well as fundamental analysis if you know the story behind the cryptos.

The speaker personally prefers sticking with stocks for now and trading some crypto-related companies that are benefiting from this strong trend in 2021.

Benefits of Trading Silvergate

Silvergate manages transactions for different cryptos and makes money just on trading bitcoin and exchanging different cryptos.

Their earnings are through the roof, making it a good way to play the space.

Conclusion

In this section, the host thanks the guest for coming on and mentions how much fun it was. The guest expresses gratitude for being invited and hopes that his insights were helpful to viewers.

Thanking Guest

The host thanks the guest for coming on even though they went over their allotted time.

They express how much fun they had during the interview.

Guest's Gratitude

The guest expresses gratitude towards the host for inviting him onto the show.

They hope that their insights were helpful to viewers watching.