February 16th, 2007
TC2007 is a wonderful tool for organizing sorting, filtering, notating and viewing stock charts under a variety of time horizons. However, as I mentioned in the previous post, it’s so flexible that it can get unwieldy. When I first got the software, I dove right in drawing trendlines, writing custom scanning formulas, building all sorts of random watchlists. All in all, I had no procedure or rules for using my charting software and the performance of my portfolio indicated that I had no investment discipline.
I’d page through hundreds of individual stock charts until I got worn out, looking for classical patterns such as triangles, heads-and-shoulders, wedges and channels. I then tried various mathematical indicators (stochastics, Money Flow, Bollinger Bands, MACD …. for a comprehensive over see Wikipedia on Technical Analysis). I built custom filters combining various financial and market variables, such as earnings growth, p/e ratios, dividend yields and price relative strength using those mathematical indicators.
Worden Bros. has run user groups on Yahoo (Telechart Users Group, TeleChart Telenet Users Group) and others that are adhoc (click hear for list) where I discovered that everyone was trying to come up with the same scanning formulas of one sort or anotherbased on their own pet theories of how best to filter out stocks with either the greatest potential for moving up or those already moving.
And then I saw the expression CANSLIM. In short:
“O’Neil [the founder of Investors Business Daily] discovered seven characteristics shared by most of the biggest gainers and combined them into a strategy for finding future rockets. He named his selection strategy CANSLIM, an acronym of the seven required factors. He first described CANSLIM in his best-selling book: “How to Make Money in Stocks,” now in its third edition.
At its heart, CANSLIM is a momentum system, requiring fast earnings growth combined with a strong price chart. But it also includes other requirements not usually identified with momentum investing.”
The seven factors are:
- C = Current (quarterly) earnings growth
- A = Annual earnings growth
- N = New highs
- S = Supply and demand
- L = Leader in industry
- I = Institutional ownership
- M = Market direction
For a long time I didn’t know what that meant or where it came from …. other than, after researching it, found that it sounded very complex. Why reinvent the wheel? I have no pride of ownership. I looked at the charts printed weekly in the IBD paper of the IBD100 and IBD New America and it appeared that they consistently outperformed the S&P 500. The challenge then seemed simply to piggy-backing on the years of experience, the wealth of research and data in IBD so that I, too, could produce returns that beat the averages. If I could only figure out how to integrate IBD’s data with my own charting using Worden’s TC2007. It was easier said than done.
to be continued ……