UPDATE 3/22/17: I no longer trade or look for CANSLIM criteria. I wasn’t using it much to begin with, but when applying Pareto’s Principle aka the 80/20 rule I found that CANSLIM was not providing me much of substance. Not to say it doesn’t work for some, but it is just not for me. There is still some useful infomation here, especially if you are interested in CANSLIM.
CANSLIM A flawed system
If you found this post likely you have a good understanding of the CANSLIM method already. If not go read How to Make Money in Stocks by William O’Neil. An older version is probably available at your local library. The fundamental analysis of the system I think still has value, but the technical analysis and buy points they suggest are not the best method for many, particularly those who work full-time and trade on the side.
I have always liked the premise behind the CANSLIM methodology, but I could never find a way to make it work with my busy day to day life. The problem is they want you to buy breakouts. Breakouts happen most of the time during the day. This creates a conundrum for the average working person. How can you monitor the market all day to buy at the correct buy point? I know modern brokers provide some amazing trading apps, and you can set alerts, etc. However, if you take your job seriously there will be times when you cannot stop and enter a trade. Another alternative some people use to get around this is to use conditional orders. Doing this you can set a market or limit order to be triggered only if the price is greater than a certain level. So if you think the ideal buy point of the breakout would be $20.20, you can set a conditional that would place a market order for the stock once it trades above that level. The only problem is volume is not taken into account. Often times in the middle of the day stocks can have very erratic behavior and you could easily buy at the high of the day with this strategy.
In today’s environment, breakouts have a high failure rate
Another problem is that there are so many breakout traders that we see an overwhelming number of breakouts fail these days. I can get data on this if anyone is interested, but do not take my word for it. Look through past charts yourself and you will see countless breakouts that failed. Many of them eventually go on to new highs, but it would depend on your stop loss system whether or not you would still be in the stock or not at that point.
IMO, pullbacks work better with CANSLIM
So what is the better method? In my opinion, pullbacks are the way to go. How you define a pullback can vary greatly. I have a few indicators that I use, but my favorite is probably very long term trend lines, if possible. A stock in a newer trend, which is of course a preferred stock to be in may not have a super long term trend line. Use the longest trend line possible. A pullback to a long term trend line on a high rated IBD stock is my favorite buy signal, but I prefer to see multiple technicals line up. I use Bollinger Bands, RSI, horizontal trend lines, and something I got from Jesse Stine in Insider Buy Superstocks called the “magic line”. These are my most used indicators, but I do have a few others. Have a look at some of the information presented in Adam Grimes’ Free Trading Course, as well as his book, and blog. There he goes through many indicators and that is where I settled on many of the ones I use. He has done extensive backtesting of what works and does not work. It is a laborious effort to get through, but very well worth the effort if you are serious. Another great resource for learning a pullback methodology is Dave Landry and his book The Layman’s Guide To Trading Stocks.
More to come
I will post more information on my pullback methodology in a future blog post, but the basic idea is a determine a very solid support level using all of the aforementioned techniques. I place a limit order at or sometimes below that level(price will often shoot through a support, faking many people out and then resuming its long term uptrend briefly after that). After I am in a trade I will set my stops, but I do not enter them in to my broker, they are tracked on a Google Docs document as I prefer End of Day stops. During a trading day in todays environment, there is a lot of noise intraday that can wreak havoc on retail traders stops. I prefer to not have my stop order sitting out there for this reason. I will detail my stop methodology at a future date as well.
Are you using IBD?
Hopefully this gives you some insight in how to modify CANSLIM for the working person. Are any of you using IBD in some capacity for your trading? Let me know if you are and if you have modified the system in some way in the comments section below.
The advice provided on this website is general advice only. It has been prepared without taking into account your objectives, financial situation or needs. Before acting on this advice you should consider the appropriateness of the advice, having regard to your own objectives, financial situation and needs. Where quoted, past performance is not indicative of future performance.
SpeculateFreedom.com disclaim all and any guarantees, undertakings and warranties, expressed or implied, and shall not be liable for any loss or damage whatsoever (including human or computer error, negligent or otherwise, or incidental or consequential loss or damage) arising out of or in connection with any use or reliance on the information or advice on this site. The user must accept sole responsibility associated with the use of the material on this site, irrespective of the purpose for which such use or results are applied. The information on this website is no substitute for financial advice.
Also published on Medium.