Book Notes - Momentum Masters

This is a great book for traders and investors alike. @hitesh2710 suggested I read the book sometime back. Unlike a lot of other books, this one is packed with practical advice from successful practitioners. Because it is written in a Q&A style, it is very easy to read and brings together the answers of all the 4 participants together so that you can understand the similarities and differences in their individual approaches.

Below are my notes & highlights from the book. They are a bit exhaustive and hence a bit lengthy.

• The first thing I do is look at earnings released and news items that may affect my holdings, and I also look at premarket futures to get an idea of how the market will open. I then review all my current holdings and update my stops and set alerts; I set audio alerts on my buy candidates at price levels near my target purchase price and also at levels near my sell stops.
• Everything I do is thought out; I don’t like surprises, so I try to work out as much as possible in advance so I don’t get blindsided and caught off guard. I do this work outside of market hours to remove emotion.
• I usually don’t do much in the first 45 minutes of trading because there are many false moves and reactions to overnight news.
• I know what and where I’m going to buy before the market opens, so there are no surprises, and I just act without thinking. I start in the morning by checking all my open positions. 
• Everything I need to know is based on the stock’s price behavior and volume; the rest is pure noise.
• If a market is going to move, then big funds and institutions are going to drive it. The bigger players have to buy and sell often during days or even weeks. Individual traders have a significant advantage over the big traders, because individual traders can move in and out of positions much faster. So they can change direction very quickly when market conditions change, and to me, that’s a tremendous edge.
• The big money is made in the longer-term moves.
• Bottom line, if you hone your timing and talent to spot the setups and if you have the fortitude to stick to the rules, it doesn’t matter if you start out small; you have a true edge that few traders possess, especially if you do your homework every night and on weekends.
• You shouldn’t be afraid of thinly traded stocks; you should embrace them. Some of the biggest winners are small companies that you’ve never heard of before. But you have to be careful and only trade a position size you can get out of safely. A small position is better than no position, especially if the stock has the potential to skyrocket.
• All the biggest-moving stocks I’ve owned during the past 20 years, where I’ve made 95% of my money, were ones hitting new highs from very solid bases.
• The best time to buy the large-cap names is coming out of a bear market or a deep correction. With small caps, I tend to trade them close to new highs because they’re less efficiently priced, so I don’t have to “beat the crowd” and try to buy lower.
• By definition, if a stock is covered by many analysts and watched by thousands of traders, then it has a far less probability of being inefficiently priced and thus yielding a quick alpha move. It doesn’t mean the stocks shouldn’t be traded or purchased at certain times; but in general, if you’re looking for alpha, you should be discounting the larger capitalization.
• It is rare when you have a market where you can have both longs and shorts. In a market that is trending in one direction, that’s the side you should be leaning toward. Markets moving sideways can be very tough to trade both ways.
• Even though my intuitive feel is pretty good, I have learned not to trust my opinion, because it will eventually be wrong. If you have a strong conviction on a trade, it will be difficult to trust the market and divorce your idea.
• I will only add to positions that are moving higher and performing well. Positions only become bigger with appreciation and follow on purchases after new bases are formed.
• The overall market must be showing strength with higher highs and a significant portion of those market stocks marching into new highs as well. Many strong bases on the charts, as well as strong expanding earnings on a high number of those stocks, are critical indicators of the overall health of the market and ultimately my portfolio.
• The only way to consistently outperform is to be concentrated in the names that are outperforming.
• There should be a period of a week or more of very quiet and very tight price action before a stock makes a move. 
• Many of the best trades occur when you have fundamentals, technicals, and a bullish general market all in your favor. So I try to focus on companies that have solid fundamental and technical characteristics during a healthy market environment. However, life is not perfect. Stocks that set up well technically, in a manner I refer to as “unexplained strength,” are often good riskreward plays because they are less obvious and not as likely to be “crowded.”
• So, yes, I will trade stocks with a lack of apparent fundamentals when the chart is really strong. Most of the time when I ignore surface fundamentals, the stock is in a very high-momentum situation, and the chart is saying that something really big is definitely going on.
• I define an uptrend as a stock with its 50-day moving average above its 200-day moving average and both are trending higher. Even stronger uptrends can be defined as the 20-day moving average above the 50-day, and the 50-day is above the 200-day moving average. 
• The most important indicator is the overall market trending up with higher highs and higher lows, and the same goes for the stocks that I look to buy. Next would be a well-defined base and then the strength of the group.
• A breakout is a stock emerging out of a base or sideways consolidation. I like a base to be at least four weeks or longer. As the stock breaks out, the volume should be larger than average. The volume should increase at least 25% or more. The best moves start with very big increases in volume of 100% or more.
• You want a stock to rise on higher volume and pull back on lower volume because the buying and selling by institutions is what moves stocks in the market, and the institutions can’t hide the fact that they have to buy in size. The most important area to concentrate on is what volume is doing at key points like breakouts to new highs, breakdowns from bases, and even when a stock undercuts a previous low.
• I want both the fundamentals and the technical characteristics of the stock to be in an uptrend. I have much more confidence in holding a stock that has good fundamentals than if I’m buying based solely on a good chart. There are so many stocks to choose from, why not go with the one that has the best characteristics.
• I am usually more successful if I spend a number of hours researching the fundamentals, listening to conference calls, investigating the company’s website to really get to know where the company has been and its future plans.
• You want to watch the general market but not to the point that you sell all your stocks when your indicators flash a downtrend.
• I think most traders would do much better if they completely ignored the “market” or the major indexes and just focused on the stocks themselves.
• Stock trading is about anticipating coming movements and then waiting to be proved right or wrong. Even if I turn bearish on the market while I’m holding longs, I will usually let the stocks stop me out. I don’t usually sell everything on my “opinion” of the market. I simply tighten my stops and let the price action take me out of the positions one by one. Very often a handful of my stocks will hold their stops, and I’ll even get through a market pullback still holding names I had before the correction began.
• If things are working, I get more aggressive. When my stock trades are not working well, I cut back my exposure and the number of commitments. This is a very simple method but very effective. If you scale up when trades are working and scale back when things are not working well, you ensure that you will be trading your largest when trading your best and trading your smallest when trading your worst.
• In a year, you really only need one or two really good stocks to have great performance, but you must handle them right. You must add to a stock after it has built a new base following its first move up. You can add to it again on subsequent bases. On a longer move, you can build the size of the position into 20–25% of your portfolio. A position of that size should only be achieved through price appreciation and by adding more on subsequent bases.
• The problem about setting price targets is that the best stocks usually end up going a lot further than anyone expects.
• I don’t usually make all-or-nothing decisions, especially on winning positions, but instead I scale in and out of them. If something has had a big move and is extended and looks like it is starting to pull back, I might sell a portion of the position, but I never want to lose a position in a stock that looks like a leader. Once you sell out the entire position, sometimes you can miss the next move higher.
• During the beginning stages of a new bull market is the best time to hold, and in the late stages of a bull market—usually after several years—is the best time to trade shorter-term
• During the beginning stages of a new bull market is the best time to hold, and in the late stages of a bull market—usually after several years—is the best time to trade shorter-term moves and sell into strength.
• I also had to learn to practice patience. The fear of missing out is a strong emotion when trading. It is the root of many trading failures. I have two main rules: (1) no forced trades. (2) no big losses. You must develop “sit-out power,” the ability to wait for correct setups and not force action and take subpar trades.
• Minervini: 
1. Think risk first. Always trade with a stop loss and know where you’re getting out before you get in. 
2. Keep losses small and protect your breakeven point once you attain a decent profit. 
3. Never risk more than you expect to gain. 
4. Never average down. 
5. Know the truth about your trading—study your results regularly.
• Ryan: 
1. Cut your losses and keep them small. 
2. Be extremely disciplined. 
3. Trade smaller if you have a number of losses in a row. 
4. Never let a good gain turn into a loss. 
5. Move money from your losers to your winners.
• Zanger:
1. Never let a stock get below what you paid for it. 
2. Never chase a stock that is up more than 3–5% above its pivot or breakout area. 
3. Avoid options. 
4. Reduce position size after a good move up. 
5. Hang on to those winners and let go of the laggards.
• Ritchie II: 
1. Always trade with a plan, specifically one that evaluates risk in every possible way for an individual position as well as your entire portfolio. 
2. Always reduce trading size after a big loss or losing period. 
3. Shift capital to ideas and strategies that are working and reduce it from ones that aren’t. 
4. Guard your emotions with equal value to the way you guard your capital. 
5. Bring your “A” game every day.