Overview
This presentation explains Mark Minervini’s trading strategy, focusing on price cycles, chart patterns (especially the Volatility Contraction Pattern, or VCP), relative strength, fundamentals, risk management, and concrete trading rules. Practical tips and criteria for applying the strategy are provided throughout.
Minervini’s Approach and Key Principles
- Minervini’s strategy aims to "hit and not get hit," emphasizing risk control and asymmetric reward-to-risk trades.
- The price cycle is divided into four stages: Stage 1 (neglect/consolidation), Stage 2 (advancing/accumulation), Stage 3 (topping/distribution), and Stage 4 (declining/capitulation).
- Recognizing transitions between stages is critical for identifying opportunities and avoiding declines.
- Chart patterns such as VCP, power plays, and cup-with-handle formations are central to the approach.
- Relative strength analysis highlights market leaders that typically outperform the index, especially near market bottoms.
Identifying and Trading Chart Patterns
- VCPs create low-risk, high-reward entry points by showing contracting volatility and declining selling pressure; key signs include tightening price ranges and low volume before breakout.
- The "one-two punch" (trigger bar) is a tight, low-volume bar before breakout, often near the 10 or 21 EMA.
- Variations include low/mid pivots and cup completion cheats; pivots can form at various levels in a base, not just the classic handle.
- Power plays/high-tight flags feature rapid price advances and shallow consolidations near short-term moving averages.
Fundamental and Technical Screening
- Focus on stocks with accelerating earnings, sales, and profit margins; margins are especially impactful for earnings per share (EPS) growth.
- Stocks often peak while reporting strong earnings; monitor for deceleration after such peaks.
- Use a trend template for screening: Price above key moving averages (50, 150, 200 days), upward-sloping averages, strong relative strength (>70, ideally >90), small float, and recent IPOs can be favorable.
Breakouts and Market Context
- 91% of 3,000 historical breakouts occurred while the NASDAQ Composite was above its monthly 10 EMA, highlighting the importance of trading with the overall market trend.
- Market leaders make their lows before market indices bottom and often break out ahead of the general market.
Risk Management and Trade Execution
- Always use stop losses, planning exits before entry.
- Optimal reward-to-risk ratios (e.g., 2:1 or 3:1) reduce the required win rate for profitability and allow for manageable losses.
- Position sizing should risk 1–2% of account equity per trade (preferably ≤1%); stop losses typically 3–5% below entry, adjusted based on recent results.
- Free-roll trades by moving stop losses to break even after partial profits are taken (“progressive exposure”).
- Analyze recent trading results to scale exposure up or down according to market feedback.
Selling and Trade Management Rules
- Sell or reduce positions on rapid price advances, violations of key moving averages (20 or 50-day), or after achieving multiples of initial risk.
- Late-stage bases or negative post-breakout signals (low volume, high-volume declines, weak closes) should prompt caution or exits.
- Never add to losing positions; trim or exit if a stock fails to move as expected or demonstrates a clear character change.
Developing Skill and Mindset
- Practice by creating a large annotated model book of VCP patterns for skill acquisition.
- Adopt systems and daily habits that reinforce disciplined trading and review of setups.
- Maintain a clear vision, reverse engineer goals, and execute with relentless discipline.
Decisions
- Always use stop losses and define the exit point before entering a trade.
- Screen for strong technical and fundamental characteristics when searching for candidates.
- Adjust position size and risk based on account size and recent performance.
Action Items
- Daily – Trader: Run screens for setups matching Minervini’s trend template and VCP criteria.
- Daily – Trader: Annotate at least 11 high-quality VCP examples to build a model book.
- After entry – Trader: Move stops to break even or higher after partial profits are taken.
- Weekly – Trader: Review recent trades to adjust exposure and refine stop placement.
Recommendations / Advice
- Focus on trades aligned with both the underlying stock’s setup and the broader market trend.
- Manage risk tightly; never widen stops in poor environments, and avoid large drawdowns.
- Concentrate in leading stocks but avoid overexposure to any single position.
Questions / Follow-Ups
- Refine criteria for identifying high-probability pivots within broader patterns.
- Test position sizing and stop loss strategies under different market conditions.
- Continue to track the relationship between market trend and breakout success rates.