Trade Like a Stock Market Wizard: Why Buy Near the High?

The one in your account that keeps falling

You already own it. You check it most days. The number is a little worse each time, and each time you decide to give it a bit longer.

Mark Minervini would have closed it months ago. He would also never have bought it in the first place.

His book is built on a habit that sounds backwards. He buys shares that have already gone up, close to their highs, and leaves the fallen ones entirely alone.

A price is the record of who turned up. He is not claiming the share on the left is a bad business. He is saying there is a queue leaving it, somebody in that queue knows why, and he is not going to find out in time.

His reasoning is plain. A share that keeps falling has sellers in it. Somebody who knows more than you is getting out, and you cannot see who or why. A share that keeps rising has buyers in it, and buying is the thing that moves prices.

There is a second reason, and it is about you rather than the share. The word cheap is a story somebody tells about a price. Whether a share is rising is a plain fact you can check this evening. He builds only on the things he can check.

That is the whole inversion. Everything else in the book follows from it.

Four rooms a share can be in

Before anything else, Minervini sorts a share into one of four states. The map is older than his book. Stan Weinstein made it widely known in the 1980s.

A share is ignored, drifting sideways, and nobody discusses it. Or it is climbing. Or it has stopped climbing and is changing hands near the top. Or it is falling.

Drawn as rooms rather than as one long wave, because a share does not glide from stage to stage on a schedule. It sits in a room, sometimes for years. He gives up the room where the bargains are and the room where the excitement is.

Only the climbing state interests him. Everything else he leaves alone.

Written down, that sounds obvious. It is not what most people do. A great deal of buying happens in the ignored state and the falling state, because those are the two where a share looks cheap.

India has thousands of listed companies. On any given day, most of them are sitting in the ignored room or the falling one. Your broker app will cheerfully show you the day’s biggest fallers on its home screen. Minervini would tell you that list is the wrong list to be reading.

The filter he applies first

He turns that map into a set of conditions a share must satisfy before he will look at the business behind it. All of them are about the price. None of them requires an opinion.

The mesh is not clever and it is not trying to be fair. It is trying to leave him with a list short enough that he never has to talk himself into anything.

Read the right column again. Every row is there to exclude a specific way of being fooled, and the last one matters most. A share that goes up on good days and down on bad ones is telling you about the market, not about itself.

It is not a fault. The filter is not trying to be fair or complete. It is trying to produce a short list, and it is content to miss good shares in order to do it. Minervini would rather ignore a hundred opportunities than argue with himself about one.

The price filter is only the first gate. A share that gets through it still has to earn its place on the business side. He wants profits and sales that are growing faster than they were before, not simply growing. He wants a reason for the change, usually a product or a market that has genuinely shifted.

The order matters more than the contents. He never starts with a good business and waits for the price to agree with him. He starts with a price that is already behaving, then asks whether anything real sits underneath it.

That is worth sitting with, because the cost is real. A method that rules out most of the market will keep you out of good things. You will watch it happen, more than once.

The quiet bit before a move

Now the part the book is best known for.

A share that has run up does not simply carry on. It pauses. Minervini’s claim is that useful pauses have a shape, and that the shape can be seen.

In a useful pause, each dip is shallower than the one before it. Trading goes quiet. The daily range narrows, and narrows again, until there is very little movement left in it.

The marks along the bottom are how much is changing hands. They shrink as the swings shrink. That pairing is the whole signal for him: a narrow range on heavy trading means an argument, and a narrow range on very light trading means the argument is over.

What he thinks is happening underneath: every dip shakes out another group of nervous holders. After enough dips, there is almost nobody left who wants to sell at that price. Only then can modest buying move the share, because there is nothing standing in the way.

He is describing supply drying up. That is a physical idea, and it explains why he cares about the quietness as much as the shape.

Not every pause behaves this way. Plenty of shares chop sideways for months with the swings staying just as wide as they were. He has no interest in those. The difference is the entire reason he watches the shape rather than the calendar.

In India you will also find the counterfeit version of this. A thinly traded small company can look beautifully tight for weeks simply because nobody is trading it at all. The range is narrow because the share is asleep, not because the sellers are finished.

What this looks like in India

The book was written from inside American markets. Four things here change what it costs to run, and none of them is a flaw in the reasoning.

The first is depth. A very large number of companies are listed here, and many of them change hands thinly on an ordinary day. A share can satisfy every condition on the chart and still be difficult to leave in any size. The price says yes and the order book says no, and only one of those two is on the screen you are looking at.

The second is that the exit may simply not be available.

Indian exchanges cap how far a share may move in a day. When a share is locked at the lower limit, selling is not expensive, it is unavailable: there is no buyer at any price you would have accepted. The plan was sound and the market did not let you keep it.

The third is that the rules around a share can change while you hold it. Exchanges place shares under additional surveillance from time to time, which can alter margins and how trades settle. A plan that was executable last month is not automatically executable this month.

The fourth is cost. Trading often means paying brokerage, securities transaction tax and stamp duty repeatedly, and gains held briefly are taxed differently from gains held for years. None of that appears in any chart. All of it comes out of the same pocket the method is trying to protect.

One more thing worth an evening of reading. In a broad market fall, the shares that had been strongest fall too. The decline around 2008 is documented in enormous detail from an Indian vantage point, and so is the squeeze in non-bank lending a decade later. Both are worth looking up, and neither is a prediction about anything.

So how often does he have to be right?

Here is where the book stops being about charts.

Minervini’s answer is the size of each outcome.

Seven blocks against two, and the two win. Nothing on this drawing is a number, because the argument is about weight rather than arithmetic. The arithmetic is underneath, if you want to check it.

He makes the case with sums rather than with argument. The figures below are invented round numbers and exist only to show the shape of the idea.

The left column is wrong more often than it is right and finishes ahead. The right column is right most of the time and finishes behind.

This is the turn in the book, and it took me two readings to see how much weight it carries. Everything earlier, all the filtering and the waiting, is in service of this table. The point of buying only what is already working is not that it makes you right more often. It is that it lets you find out quickly when you are wrong, while the mistake is still cheap.

Why one bad loss costs so much

The table above is gentle. Real losses are not symmetrical with real gains, and this is the reason.

One person, one ladder, two depths. Look at how many more rungs the deep pit needs. Digging twice as far down does not double the climb out, and that is the part nobody feels until they are in it.

Take an invented ₹1,00,000. Lose half of it and you have ₹50,000 left. To get back to where you started, that ₹50,000 now has to double. The fall needed one bad decision. The recovery needs a long run of good ones.

The further an account falls, the harder that arithmetic becomes, and it turns against you quickly. A loss taken early is the cheap version of the same mistake.

Minervini’s conclusion is unromantic. Protecting the money you already have is worth more than any improvement you could make to your selection.

Where the risk is actually decided

Most people decide what to buy, then buy it, then wonder what to do if it goes wrong. Minervini reverses the order. He fixes the exit before he has a position at all.

The exit then decides the size of the purchase, which is the part people miss. If the sensible exit is far away, that share can only be bought in small quantity. If the exit is close, you can buy more of it for the same loss.

Every column starts from the same line and ends in the same shaded block. Only the stack of shares changes. That block is the amount you agreed to lose, and it is the one thing in the drawing that never moves.

The last row never changes. The row above it does all the adjusting. That is what he means by controlling risk, and it is a calculation rather than a feeling. If you want that arithmetic worked through on its own, without a book attached to it, there is a separate piece on how much to risk per trade.

All of which assumes you can actually get out at the price you chose. In an Indian market that assumption does more work than it looks like, and the section above explains why.

Why the simple part is so hard

None of this is intellectually difficult. Almost nobody does it. The book is honest that the obstacle is the person, not the method.

The price you paid is a fact about one afternoon that has already happened. It quietly turns into the level the share owes you, and a person standing on a line in mid air does not feel the need to move.

Watch how that works in practice. The share falls past the level where the plan said sell. Selling would make the loss real, so the decision gets postponed until it comes back to what you paid. It falls further, and now the loss is too large to accept. At some point you announce to yourself that you are a long-term investor in it, and it becomes the holding you stop mentioning.

Nothing about the company changed through any of that. The only thing that changed was what you were prepared to admit.

The same reflex works in reverse on the winners. A position that is going well makes you nervous, so you close it early to make the gain safe. Small wins and large losses are the natural output of a comfortable mind.

His remedy is not a psychological trick. The decision has to exist before you own anything, and it has to be written down. A rule you invent while a position is falling is not a rule. It is a preference, and preferences move.

The case against it

A method described only by its good days is an advertisement. Here are the honest problems.

It is a practitioner’s account, and that is a real weakness. Minervini is an American trader who became known through a public trading contest. One person’s record, however good, is one result. Plenty of people have followed similar rules. You have never heard of them. That is exactly why the ones you have heard of are not a fair sample.

The faint figures are drawn faintly on purpose. They followed similar rules, they did not write a book, and nothing about them reached you. Any judgement built only on the person standing on the box is built on a sample of one.

The method needs a market that trends. In a long sideways stretch, shares break out of tight ranges and then fall straight back in. Each of those costs a small loss, and small losses in a row add up to a large one. The book is written from inside markets that moved. Whether the market you are in is one of those is itself a question about cycles, and Howard Marks is the writer who takes that question seriously.

It also costs money to run. Frequent trading in India means brokerage, and gains held briefly are taxed differently from gains held for years. Neither appears in the reasoning above, and both come out of the same pocket.

There is a deeper objection as well. Every condition in his filter is measured from what has already happened. A share qualifies because it has been strong, which is another way of saying the evidence arrives late by design. He would accept that description. His answer is that late and checkable beats early and imagined, and that is a preference rather than a proof.

And it asks for attention. Watching for the moment a range tightens is not something you do on a Sunday evening. Somebody with a full-time job will either do it badly or not at all, and doing it badly is worse than not doing it.

A practical checklist

Everything above is a way of thinking. This is what that way of thinking actually asks somebody to have answered, in order, before they act on it.

Things you can check today

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All of this is on your phone, free, in about ten minutes. None of it tells you what to buy.

• Open the chart and set it to one year. Is the price near the top of that year, or near the bottom?He only looks at shares sitting near the top of their own year.
• Switch on the 200-day average line, which every app draws. Is the price above it, and is the line itself pointing up?Above a rising line means strong for months, not for a week.
• Open the Nifty chart beside it. Over the same year, which of the two went up more?A share that only rises when everything rises is telling you about the market, not itself.
• Look at the volume bars under the price for the last few weeks. Are they getting shorter?Going quiet after a big rise is the pause he waits for.
• Write one price on paper: the price at which you would say you got this wrong. Have you actually written it?A number picked while you are calm survives a bad day. One picked during a fall does not.
• Check how many shares change hands on an ordinary day. Would your order be a small part of that, or most of it?If your own selling moves the price, you cannot really get out.
• On the NSE website, open the ASM and GSM lists. These are the extra-watch lists the exchange keeps. Is the share on either one?Those shares carry extra rules, and a plan made last month may not work on them.

Nothing here says what to buy or sell. Every line is something to look up or write down.

Four of those tell you whether the share even qualifies. Three tell you whether you could get out again. Most people only ever do the first four, and the second three are the ones that cost money when they are skipped.

If you take nothing else

Suppose you read the book and decide none of it is for you. That is a reasonable conclusion. Three things are still worth taking.

Decide what would make you wrong before you commit, not after. The decision is cheap while you are calm and nearly impossible once money is moving.

Judge an outcome by its size, not by how often you were right. Being right most of the time is comfortable and settles nothing.

And notice the instinct to close what is working and hold what is not. It is the oldest complaint in the market, which is why the sharpest line about it is a century old.

None of those three needs a chart, a screen or a trading account. They are habits about how a decision gets made, and they cost nothing to adopt.

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It never was my thinking that made the big money for me. It always was my sitting.

Check yourself

4 questions

Answer in your head first. Guessing and being wrong still helps you remember.

1. 01Why does Minervini refuse to buy a share that has fallen a long way?Show

   Because a falling price means sellers are still in control, and he has no way of knowing what they know. He does not claim the share is bad. He claims he cannot tell, so he waits until buyers have visibly taken over.

2. 02His filter rules out most shares on most days. Why is that intentional?Show

   The filter is not built to describe the market fairly. It is built to produce a short list quickly. He accepts missing many good shares as the price of never having to argue with himself about a doubtful one.

3. 03What is he actually looking for when a share goes quiet after a run?Show

   Supply running out. Each shallow dip removes another group of nervous holders, and the shrinking range with very light trading suggests there are few sellers left. After that, modest buying can move the price because nothing is in the way.

4. 04Why does he say the size of your losses matters more than how often you are right?Show

   Because the arithmetic says so. A few large gains against many small losses finishes ahead, while many small gains against a few large losses finishes behind. Frequency of being right does not decide the result on its own.

Credit where it is due

Every idea above belongs to Mark Minervini. It comes from Trade Like a Stock Market Wizard: How to Achieve Super Performance in Stocks in Any Market, published by McGraw-Hill in 2013. The four-stage map he builds on is older. Stan Weinstein set it out in Secrets for Profiting in Bull and Bear Markets in 1988.

A short article cannot carry what makes the book useful. Minervini works through his reasoning in far more detail, with the specific conditions written out. The detail is most of the value. He is also more cautious in print than his reputation suggests. He repeats often that the rules mean nothing to somebody who will not follow them on a bad day.

The parts I have left out are the parts you would buy it for. If anything here was useful, it came from him.