My model is based on my statistical studies of how the major stock market averages actually behave on a price/volume basis going back many decades. My model is largely responsible for my KPMG verified long term track record and has kept me on the right side of the markets since 1991. The model is not a black box in that it integrates many variables (price/volume, shape of price/volume action, market indices and leadership) into a complete picture. I continued to refine the model as my ability to identify proper distribution (selling pressure) and confirmation days (buying pressure) improved, much as one would continue to refine their ability to interpret the strength or weakness of a basing pattern in a chart.
Now, the M in William O'Neil's CANSLIM stands for market direction. My research studies I started back in '91 were motivated and inspired by that. But there was a lot of confusion as to what, say, was a proper distribution day and a proper follow though day. The different variables were not defined in a way that was consistent and it created a lot of confusion.
In '91 being in grad school and being very much a quant, I started studying price volume action and created rules. My model differs somewhat from O’Neil’s system. O’Neil, for example, used to primarily want to see follow through days in the fourth to seventh days of the attempted rally; but you can sometimes get follow through days that work on the third day, or even well beyond the seventh day, as long as the price/volume action of the leading indices and leading stocks is sound.
One important aspect to my model is risk management. Whenever my model issues a buy or sell signal, it has a fail-safe built in so if the signal proves to be false, the model will go to cash.
In fact, my Market Direction Model was up +55.1% from June 1, 2009 - June 1, 2010 in a test fund using actual money, with exposure to the market less than half the time. Rothstein Kass, well recognized in the world of fund management, has audited the account. In a separate account that was not using actual money, I wanted to see how my system held up against a volatile instrument such as the 3-times technology ETF TYH, going 100% long on buy, 100% short on sell, and 100% cash on a neutral signal. Such instruments did not exist until the last year, so this gives big opportunity for profit that did not exist before. From March 12, 2009 (the day of the big first FTD) to June 30, 2010, the model was up +207.4%.
In 1998 I worked with the head programmer at O’Neil. We wanted a computer to identify the quality of a base and act accordingly. But what we found was it is virtually impossible to tell a computer what we are seeing. There are too many exceptions. There is no substitute for experience. Experience gives you in depth knowledge and understanding so you know when to make exceptions. O'Neil is perhaps one of the best at doing this. O'Neil doesnt trade CANSLIM. CANSLIM is for retail investors. While O'Neil's inherent logic behind his trading overlaps greatly with CANSLIM, O'Neil's ample experience enables him to deviate from CANSLIM at critical moments. This is one of the things that make O'Neil legendary.
That said, we monitor the market daily, run our screens, look at many charts and hand pick the best of the bunch for our members.
Go back through all your trades for the last two to three years. Print out the charts and take out a red pen and mark where you bought and where you sold. Then make a list of the mistakes you have made. Write out a list of how not to make those mistakes and paste that list up on a wall. Carry the charts with you so you can review them frequently. This reinforces what you did right, and what you did wrong.
Also, make sure you understand your trading personality and trading psychology so you can position size accordingly. If you are taking on position sizes that creates volatility in your account that you cant stomach, you are liable to sell too soon.
Finally, keep a regular journal of your trades, your successes, your failures, and your market observations, then review it monthly. You may be surprised how much you learn by doing this.