In The Trading Cockpit with the O'Neil Disciples

Strategies that Made Us 18,000% in the Stock Market

Gil Morales, Chris Kacher

• Publisher: Wiley
• Year: 2012
• Print ISBN: 9781118273029
• eBook ISBN: 9781118283080
• Edition: 1
• Topic: Business
• Subtopic: Finance
• Index: Business

Praise for In the Trading Cockpit...

"Morales and Kacher want you to see an alternative to popular and traditional dead end strategies (i.e., buy and hope). Absorb the insights of In the Trading Cockpit with the O'Neil Disciples and put yourself in position to think differently—and profit."
— Michael W. Covel, Bestselling author of Trend Following and The Complete TurtleTrader; President, Trend Following

Your hands-on guide to mastering powerful trading methods inspired by stock market legend William O'Neil

Written by two former William O'Neil + Co. employees who have spent years building upon the lessons they learned working alongside the master, this book delivers powerful trading techniques based on the O'Neil model that you can put to work in your own portfolio, right away.

The follow-up to their bestselling Trade Like an O'Neil Disciple, In the Trading Cockpit with the O'Neil Disciples goes beyond the descriptive narrative of the former book to provide you with step-by-step guidance and all the practice you need to quickly master those tried-and-true methods and make them an integral part of your trading system.

You'll find:

• Clear, step-by-step explanations of powerful new trading strategies, including techniques for buying pocket pivots and gap-ups
• Hundreds of annotated examples—with charts—of real-life trades from the authors' own experiences with detailed analysis of what worked, what didn't, and why
• Set ups with buy, add, and sell points for both winning and losing scenarios
• Dozens of skill-building exercises that help you quickly master the techniques described
• Tried-and-true stock shorting techniques based on William O'Neil's methods

Written by established experts Gil Morales and Dr. Chris Kacher, In the Trading Cockpit with the O'Neil Disciples is an indispensable guide to mastering proven strategies for trading stocks for record profits in every market environment.

CHAPTER 1

The OWL Ethos

Determining If the Methodology Is for You

One of the most fundamental axioms of trading and investing is that one should select and stick with a methodology that melds well with one's personal psychological makeup. A simple example might be that someone who has trouble sleeping at night when they are invested in stocks should not use an aggressive system that employs leverage or invests in securities that display a great deal of price volatility. From our perspective as O'Neil-style traders and investors, we find that our psychology and attitudinal approach to investing, our investing ethos as we called it, is best represented by what we now like to refer to as the OWL ethos. Why OWL, you ask? Because it represents the surname initials of three of the greatest traders of the last 100 years—William O'Neil, Richard Wyckoff, and Jesse Livermore. All three shared the same investing ethos, and their trading strategies and ideologies overlapped to a great degree. We discussed this close relationship between the investment methods and philosophy of all three of these gentlemen in Chapter 1, “The Evolution of Excellence,” in our first book.

Success with OWL-based methodologies lies in the degree to which one's psychological makeup and concomitant approach to stock market investing can exist in fluid harmony and synergy with the OWL approach. Thus investors interested in learning our general methodology need to ask themselves whether the OWL is really for them. “Know thyself” is one of the central tenets of investing as we see it, and the following quiz and chart exercises will help reveal where your instinctive sensibilities lie.

QUICK QUIZ

Answer the following questions as quickly as possible.

1. The O'Neil methodology is most consistently derived and/or similar to the investment philosophies and writings of:

a. Benjamin Graham

b. Jim Cramer

c. Richard D. Wyckoff

d. Joseph Kennedy, Sr.

e. Jesse Livermore

f. Milton Friedman

g. Bernard Baruch

h. A and F

i. B and C

j. C and E

k. C, E, and G

2. Nicholas Darvas implemented the original use of a technical guidepost, which he used to determine whether any stock he owned or was considering for purchase was acting “correctly.” This technical guidepost embodied a concept that correlates to today's technical concept of a chart base or consolidation. Darvas referred to these guideposts as:

a. Windows

b. Chutes

c. Rivers

d. Boxes

e. Ladders

f. Stair-steps

g. A and D

h. D and F

3. When a stock is purchased, and then begins to decline in price, the market is telling you:

a. To buy more.

b. Your original reasons and decision for buying the stock may be incorrect.

c. That your stock must now become a long-term hold since the price will inevitably come back to and above your original purchase price.

d. That it may be necessary to sell the stock and cut your loss short.

e. To go away, leave things alone, and stop watching your stock decline because it will simply “scare” you out of the position.

f. A and C.

i. B and D.

4. Investment success can best be achieved by:

a. Making stock market investing your primary hobby.

b. Buying stocks with low P/E ratios.

c. Having a sound plan and methodology that eliminate the emotions of investing.

d. Following news developments and how they might affect individual stocks and the general market.

e. Devoting sufficient time for proper study and preparation in order to develop the necessary expertise for understanding stock market movements.

f. C and E.

g. B and F.

5. Investors should approach the task of buying stocks for the purpose of capital appreciation as:

a. A shopping expedition, seeking to buy stocks when they are the cheapest.

b. A hobby, whereby one dabbles in the markets and thus avoids the stress of getting overly involved.

c. A business that is purchasing raw materials at cost and developing those materials into high-demand products that can be sold at a price much greater than the cost, resulting in a profit to the business.

d. A long-term proposition for which one must buy stocks and exercise patience before profits can be properly realized by maintaining a fixed portfolio of stocks over many years.

e. A way to become popular with the opposite sex.

6. Investment success depends on being right:

a. All of the time.

b. Roughly 50 percent of the time.

c. As often as possible.

d. Two out of three times or better.

e. None of the above.

7. Jesse Livermore always abided by a strict stop-loss rule of:

a. 12 percent

b. 7–8 percent

c. 10 percent

8. William J. O'Neil recommends cutting losses by:

a. Selling when your stock is down 12 percent from your purchase price.

b. Selling when your stock is down 7–8 percent from your purchase price.

c. Selling when your stock is down 10 percent from your purchase price.

d. Selling down to the sleeping point.

9. When it comes to taking profits and losses, it is best to:

a. Take your profits, not your losses.

b. Take your profits and wait for your losses to turn to profits.

c. Cut losses quickly and let profits run.

d. Keep profits to a minimum in order to avoid paying taxes.

e. Operate according to a general philosophy of keeping your losses as small as possible.

e. A and B

f. C and E

10. The OWL methodology is primarily:

a. A day-trading system.

b. A trend-following system.

c. A long-term strategic investment system.

d. A value-oriented investment system.

e. A fully invested strategy that does not attempt to time the market.

11. The OWL methodology is:

a. A symmetric strategy.

b. An asymmetric strategy.

12. Jesse Livermore said that the “uncommon man” is one who can:

a. Be right trade after trade after trade.

b. Sit through huge drawdowns.

c. Sit tight and be right.

d. Read the meaning behind every twist and turn of the market tape.

13. The difference between a pivot point and a pivotal point is:

a. Two letters, “a” and “l.”

b. One is viewed in real time, the other in postanalysis.

c. One is limited to an upside breakout, the other to a significant price/volume signal that indicates a potential strong price movement in one direction or another.

14. In Livermore's day, the early 1900s, he understood that “pools” of large investors working in concert were a primary driving force in the markets. Choose any or all of the following that could be considered today's counterparts to the “pools” of Livermore's time:

a. Pension funds

b. Investment clubs

c. Ponzi schemes

d. Mutual funds

e. Hedge funds

f. Company insiders

g. Banks

h. Trusts

i Insurance companies

j. Financial cable TV

15. Concentrating in fewer stocks rather than being spread out among a large number of securities, but determining the exact position you should use, should be based upon:

a. Your personal risk tolerance levels, keeping in mind that holding too many positions (e.g., average position size is less than 10 percent) may be a hedge for ignorance and thus result in inferior returns.

b. The strength of the stock and the general market.

c. How far your sell stop is from the buy point.

d. All of the above.

16. Institutional sponsorship is an important factor for any stock because:

a. It represents where all investors are putting their money.

b. Institutions will support their stock when it falls to a certain price, which is how chart bases and consolidations are created.

c. Such a consistent and large flow of funds into a stock can make it move up severalfold in price over time.

d. A and C

e. B and C

17. Listening to tips and headline news can result in losses because:

a. The tip sounds good yet in reality it may be outside yo...

Table of contents

• Cover
• Series
• Title Page
• Copyright
• Dedication
• Epigraph
• Acknowledgments
• Introduction
• Chapter 1: The OWL Ethos
• Chapter 2: Mind Games and Mazes
• Chapter 3: 2011: A Postmortem for the New Millennium
• Chapter 4: Developing Your “Chart Eye”
• Chapter 5: Pocket Pivot Exercises
• Chapter 6: Buyable Gap-Up Exercises
• Chapter 7: A Trading Simulation
• Chapter 8: Frequently Asked Questions
• Appendix
• About the Authors
• Index