CANSLIM Stock Trading Strategy

Stock traders across the globe look for new trading strategies to profit from market. Trading strategies largely differ according to traders’ profit goals, type of trading, risk-tolerance, account size and personal preferences. CANSLIM is one of these trading strategies, which is considered as highly successful for most traders. CANSLIM is most beneficial for long-term traders and investors.

Investing mechanism and process
CAN SLIM is a growth stock investment strategy formulated from the study of the 500 best performing stock market winners dating back to 1953 in the book How to Make Money in Stocks: A Winning System In Good Times or Bad, by William J. O'Neil. This strategy involves implementation of both technical analysis and fundamental analysis.

The goal of the strategy is to discover leading stocks before they make major price advances. These pre-advance periods are "buy points" that are emerging from price consolidation areas (or "bases"), typically in the form of a "cup & handle" price pattern, of at least 7 weeks on weekly price charts.

The strategy is one that strongly encourages cutting all losses at no more than 7% or 8% below the buy point, with no exceptions, to minimize losses and to preserve gains. It is stated in the book, that buying stocks from solid companies should generally lessen chances of having to cut losses, since a strong company (good current quarterly earnings-per-share, annual growth rate, and other strong fundamentals) will usually shoot up--in bull markets--rather than descend.

O'Neil has stated that the CANSLIM strategy is not "momentum investing", but that the system identifies companies with strong fundamentals--big sales and earnings increases which is a result of unique new products or services--and encourages buying their stock when they emerge from price consolidation periods (or "bases") and before they advance dramatically in price.

Critics of the technique include Warren Buffett and Peter Lynch, as well as Buffett's investing guru, Benjamin Graham, all of whom prefer the value investing approach to establishing an effective stock portfolio.

CANSLIM Performance
According to the American Association of Individual Investors (AAII), between January 1998 and December 2008, market portfolios traded according to CANSLIM principles gained an average of 1,351.3%, versus a loss of 6% in the S&P 500, with gains made every year regardless of bull or bear market performance.

CANSLIM Mnemonic
CANSLIM is an acronym of various indicators/features to be considered when screening a stock for trading.

C: Represents Current Earnings: For any stock to be qualified as a CANSLIM stock, it should have great increase in current earning per share; more than 18%.

A: Represents Annual Earnings: CANSLIM stocks should have high increase in annual earning per share; more than 25% for; more than 25% for last three years.

N: Represents New: There should be something new related to the stock. CANSLIM traders look for companies which are under new management, or introduced new product, or undertaken new project or of which stock have touched a new high.

S: Represents Supply/Demand or Shares Outstanding: Good CANSLIM companies should have less shares outstanding; less than 25 million shares is good, less than 5 million is better. The less the number of outstanding shares the greater the chance of upward price movement for every good news.

L: Represents Leader: Trading stocks of leading companies (leaders of an industry or market) is better than trading stocks of followers; and every market should have at least one leader.

I: Represents Institutional Sponsorship: There should be more than 3 institutional traders or mutual funds interested in stock you are choosing. The greater the number of institutional sponsors, the larger their size are and the better their past performances, the better the stock.

M: Represents the market: Market timing is very important. Traders should use various technical analysis tools to predict and confirm trends, retracements and corrections. Buy when all major markets are going up.

CANSLIM stock trading system has proved more effective than most other long-term trading strategies. It considers various aspects of company, market and economy to make most accurate trading decisions at right time. But success of CANSLIM trading strategy require vastly on traders knowledge, his access to market data and strict following of rules.

CANSLIM Strategy Breakdown
What should you look for in a stock that relates to the basic CAN SLIM principles described above?
C: Always screen for stocks that have earnings increasing quarterly. Do not set the bar at 25% but monitor all stocks that have earnings increasing by at least this figure. As long as earnings are increasing, the stock can remain on a watch list to be tested on additional technical and fundamental screens.

A: Annual earnings are more important when searching for loner term growth stocks that can be in your portfolio for months or years at a time. Study annual earnings more often than quarterly earnings and always take a look at return on equity. Do not use a minimum threshold for ROE but set preference for stocks with at least a double digit figure in this category.

N: New products and services are important. Review closely the stocks that have debuted on the market within the 5 years as an IPO. Search for stocks within 15% of new highs or stocks holding support above the 200-day moving average that made a new high within the past 52-weeks.

S: Trading volume is very important in this trading system. Buy stocks moving higher on explosive volume. Volume must be at least 50% greater than the 50-day average. Watch carefully for sell signals when volume starts to increase as a stock violates support levels and moving averages.

L: Tend to trade leaders as far as industries and sectors are concerned but do occasionally make a purchase in a stock that may not be in a leading industry. A relative strength rating above 80 is excellent, but you should strive for a relative strength line trending higher regardless of the actual rating in IBD. Stocks travel in packs so trade the groups moving higher in an up-trend and you should be fine. Stick with the top two or three stocks within each group and your trading results improve.

I: Invest in stocks that show increasing sponsorship from quarter to quarter. Ride the trend and the big boys, also known as institutional investors, are the people that move the markets. When institutional money is flowing into a solid stock, start to dig deeper.

M: This is probably the most important portion of the CAN SLIM acronym as it will tell you what direction the overall market is trending. Avoid fighting the trend by trading in the opposite direction of the market. Watch several important factors to gauge the overall strength of the markets: Price and volume on the NASDAQ, DOW and S&P 500, the NH-NL ratio and the number of stocks trading above and below their major moving averages. Finally, keep a personal index of 20-30 stocks that you feel are the best in the market at the current time and monitor their weekly action.

Slide Show Presentation from Kenneth Gruneisen
Watch the free presentation, and get answers to the following questions:
• Each letter of CAN SLIM®
• Study of characteristics of winner (several examples)
• Technical vs. Fundamental Analysis
• How to react when a stock goes up or down
• How to achieve better than "average" returns
Part 1:
Part 2:

Sources and Additional Information: 

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