THE RIDE THE LEADERS SWING TRADING SYSTEM
The rules behind every trade we publish. A CAN SLIM-inspired system from a former Wall Street portfolio manager.
The complete rules.
On Friday morning I bought CrowdStrike (CRWD) at 189.70. Subscribers had the alert immediately: the entry, the stop at 184.16, the reason. That’s the whole service in one trade.
We hunt the strongest stocks in the market’s leading groups and swing trade them off the daily chart, holding winners anywhere from a week to a couple of months. Risk comes first: losses stay small, stops get honored, and winners get sold into strength with the moving averages keeping us in the biggest ones. Some weeks the best position is cash. We’re fine with that.
Below are the eight rules that run all of it, starting with the one that governs the others: market direction.
Rule 1. Market Direction.
Our most important rule, market direction, the “M” in CAN SLIM. As William O’Neil would say, going against the market trend is the easiest way to lose your capital.
We always respect when an index breaks its 50-day, and we pay even more attention when it’s unable to reclaim it shortly after.
History shows you do not want to own stocks when the indexes are trading below and unable to recapture their 50-day moving averages. We save breakout buying for the best conditions, i.e. when the market is in a healthy uptrend above its key moving averages. We save pullback buying for poor market conditions.
Every issue starts with our market regime. It comes from three things:
The trend. Where the index sits against its 50-day and which way that line is sloping.
Institutional selling. Distribution days in the last 5 weeks: sessions where the market falls on rising volume. That’s big money quietly unloading, and it shows up here before it shows up in headlines. A handful of these inside a few weeks has preceded almost every serious correction.
Breadth & the average stock. How many stocks are making big up moves versus big down moves, and whether that’s improving or fading. The indexes can be held up by a few giants while the average stock breaks down. We trust the average stock over the index every time. Our own research on 22 years of breakouts found they get paid when breadth is resting, not racing.
GREEN means we’re pressing our advantage.
YELLOW means we’re selective and taking smaller swings.
RED means capital preservation comes first. Most of the time that means cash.
RED doesn’t mean nothing can work. History’s biggest winners often emerge before the indexes fully recover. But in RED, we’re only interested in exceptional leaders breaking to new highs from proper bases or a new leading sector waking up from a long base. Those start small until the trend proves itself. Everything else goes on the watchlist until the market improves.
Rule 2. We buy leaders, not laggards.
Our process leads us to the strongest leading stocks in the leading industry groups.
We have learned over time that expecting a laggard to catch up to the leader rarely works. Our chips go on the leader, never the runner-up.
We watch for clues institutions are getting involved, typically months before the average investor catches wind. They leave clues behind. So understanding how to read price action and volume is imperative as it can help you spot these minor changes.
We’re also not looking for the cheapest stock in the group or the one that hasn’t moved yet. We’d rather own the company attracting the biggest institutional demand than hope money rotates into the rest later.
Rule 3. We buy strength because institutions buy strength.
Most people are taught to buy weakness. We do the opposite.
Large institutions don’t build positions all at once. They accumulate over weeks and months. That’s why the strongest stocks often keep getting stronger.
We’d rather pay a little more for a stock proving itself than a little less for one that still has something to prove.
Rule 4. Price has to prove it.
We don’t predict breakouts. We wait for them.
Every setup includes an exact trigger. Until price proves buyers are in control, we do nothing.
No trigger. No trade.
Rule 5. Every trade starts with a plan.
Every setup publishes with a trigger, a stop, and a chase line.
You’ll know exactly where we’re interested, where we’re wrong, and when a move has become extended.
If we take the trade, you’ll know how we’re managing it. Winners get trimmed into strength, and the stop moves up behind them, never down. The rest rides a moving-average trail. Steady institutional leaders earn the 20-day. Faster movers answer to the 10-day. Which line governs depends on how the stock is acting, and when a stock breaks its line, we’re done with it.
If we ever hold through earnings, that’s decided in advance, at reduced size, and you’ll know before the report, never after.
If we pass, you’ll know why.
Rule 6. Cash is a position.
You don’t have to be invested every day to outperform.
Some of the best trades are the ones you never take.
When conditions aren’t there, we’ll happily sit in cash and wait. Protecting capital isn’t avoiding opportunity. It’s preserving it for when the odds are back in our favor.
Rule 7. Small losses are part of the business.
Taking small losses and getting stopped out is a common occurrence in this business.
Investors tend to become emotionally attached to their stocks. O’Neil said it best: there are no good stocks unless they go up in price. That leaves very little room for bias. The strongest stocks, the ones with real velocity and momentum, are usually moving because the market is repricing something fundamental about the business. So when a stock doesn’t go up pretty much right out of the gate, we want to get out and go find one that does. If you hold on to a stock with a loss, hope and ego tend to take over. A tight stop is the reminder that this isn’t a game of hope. Ignoring the market has devastating consequences.
The stop also does our filtering for us. A stock that passed every fundamental and technical test but still won’t go up is telling you something. The stop gets us out while the lesson is still cheap.
Think of it this way. In an ideal world, you buy a stock and it goes up immediately. The price would never come back down to the price you paid for it. Buying low-risk entry points on the strongest stocks in the market makes that a real possibility. So we take our shots at what looks best, knowing plenty of them won’t turn out to be true leaders.
After being in this business for over a decade, I can tell you the true leaders act like leaders right out of the gate. You know the feeling when you’ve caught one, because it’s up 10-20% before you can even add more.
The best traders aren’t right as often as people think. Peter Lynch said that in this business, if you’re good, you’re right six times out of ten. William O’Neil put it closer to half, and Mark Minervini won a U.S. Investing Championship with a batting average right around 50%. Study any great trader’s record and you find the same thing: they weren’t right more often than everyone else. They lost less when they were wrong.
Study any great trader’s record and you find the same thing: they weren’t right more often than everyone else. They lost less when they were wrong.
That’s the whole trick of this system. One of my favorite quotes:
Fall in love with your stop losses, not your stocks.
Our stops cap the downside at a few percent per trade. The leaders we’re hunting can run 20, 30, even 50% in a matter of weeks. Do the math on that trade-off: five small stops cost less than one caught leader pays. You can be wrong more often than you’re right and still finish the year well ahead, but only if the losers stay small.
We’re not trying to be right all the time. We’re trying to keep the losers small and give the winners room to grow.
A stopped-out trade isn’t a mistake. Ignoring the stop is.
Rule 8. We tell you what happened.
You’ll never see a highlight reel.
Every week we’ll tell you what triggered, what worked, what failed, what we passed on, and what we learned.
A great process matters more than a great week.
The philosophy in one sentence:
Ride the strongest stocks, never fight the market, and protect your capital first.
This is the system. Next Sunday: the Playbook. The five setups we trade, with charts, and exactly how winners get sold.
Ride The Leaders is for educational purposes only and should not be considered investment advice. All investing and trading involve risk, including the possible loss of principal. The author may hold positions in securities discussed, as well as other positions not mentioned, and may enter or exit them at any time. Past results do not guarantee future returns.