The following article is adapted from Dr. Carr’s new Trading Manual, “How to Make 50% per Month Trading Stocks”
HOW I DEVELOPED THE “50% PER MONTH” SYSTEM
Some years ago I conducted research on stocks that had rallied 50% or more within a month of trading. My aim was to find what clues might be hidden in the chart of these stocks in the weeks prior to its strong rally. I figured that if those clues could be identified and quantified, I could build a screen to find such stocks before they exploded upwards. I would then be in possession of “the world’s greatest trading system”, one that could potentially return up to 50% per month! Heck, I’d be happy with half that return, even a tenth of that return. As you probably know, a 5% net gain per month can turn $10,000 into something close to $4million in about 10 years. Wow!
So, with great anticipation I spent many late nights and early mornings analyzing 500 stocks that had produced a 50% return in 1-month. Most of these charts were a thing of beauty. Some had doubled, even tripled within a month. To show you what I mean, let’s look at a couple of recent examples of stocks that have rallied strongly within a short period of time. The following chart of fiber optic producer, AFOP, is a classic example of what I was looking at:
AFOP (chart courtesy of Finviz.com)
AFOP had traded up to near $20 back in 2011, then dropped into the single-digit range where it languished for months. Meanwhile the company itself was in a stealth growth phase that went largely unnoticed by analysts. Shares of AFOP traded in a sideways channel for several months prior to its breakout. Once it crossed the $10 level, then the $15 level, both momentum and volume picked up as analysts began to play up the story. Three months later it nearly touched $35 for a 250% gain!
Here is another example. ZHNE is a communications equipment maker that had been trading in the penny-stock doldrums for months after a brief stint up near $20/share. Behind the scenes, management was putting together a streamlined company ready to explode its earnings potential. Once those earnings were announced, shares shot up over 220%!
ZHNE (chart courtesy of Finviz.com)
The 500 charts I studied were filled with examples like these. They were culled from several years of data. I made sure to weed out penny stocks, as well as stocks that had gapped up after a buyout. What I focused on were charts that presented a demonstrable footprint prior to their breakout.
My goal was to quantify that footprint. To do this I built a research scan of 14 different technical parameters, including chart patterns, and dutifully logged thousands of data points across this spectrum as each chart was assessed. After several months of work, I was done. Success! Just as I suspected, I was able to identify a set of technical parameters which dominated the charts of those stocks that rallied so strongly. Over 60% of my research list possessed a common technical print that preceded their strong breakouts.
Of course, as you may have picked up by now (especially if you have had any training in logic), there was a fatal flaw lurking in my research methodology. I write about this flaw at length in chapter 2 of my new book, Market Neutral Trading (2013: McGraw-Hill). The flaw is this: I had stacked the deck in my favor. The 500 charts I examined were of stocks that were already successful at producing a 50%, 1-month return. And yes, over 300 of those charts showed a common pattern of technical parameters which preceded the breakout. But what my research couldn’t tell me was how many stocks that show this common pattern go on to make a 50% return. All my research proved is that strong breakouts are often preceded by a common technical pattern. It in no way proved that this common technical pattern often precedes strong breakouts.
Real-money trading very quickly demonstrated the flaw in my reasoning. It turns out the technical fingerprint I had identified only goes on to breakout strongly about 4% of the time, and most of those breakouts fell far short of 50%. In 96% of the instances of the technical pattern I had isolated, the stock either trades sideways for months, breaks out briefly then falls back, or breaks down to set lower lows.
As someone who had taught Philosophy for seventeen years, you'd think I would have seen this coming. Amazing how a little profit motive can darken one’s sensibilities! But here is the good news: what I didn’t explain in my new book is that I continued to work on this system. For two years I back-tested, tweaked and back-tested some more. Along the way, I learned some very valuable lessons. What I learned was that the technical pattern I had isolated was indeed an incredibly powerful predictor of future breakout moves if, and only if, it is combined with a specific set of fundamental parameters. When these parameters and the most common price pattern preceding strong breakout moves are combined together: BINGO! No, not 50% per month. Let's be real. But a fundamentally sound, technically powerful trading strategy for sure.
If you are interested in learning the details of the system itself, you can buy my new manual, “How to Make 50% per Month Trading Stocks”, available on DrStoxx.com. Please note that, even with this powerful system, it is quite rare to find a stock that goes on to explode upwards over 50% within a month after purchase. Still, for the patient trader, using the rules I outline in the manual will allow you to position yourself in a number of fundamentally sound stocks each year which are technically poised to breakout strongly. That breakout may take several weeks to develop before the meat of the move occurs. But a strong move is to be expected. And if it doesn't happen, I have outlined position management rules that will enable you to contain risk to reasonable levels.
In this new manual, the 7 parameters of the system are fully disclosed, including the screen settings you can use to find these awesome trading setups. With the manual in hand, soon you will be finding stocks like the following: