What is CAN SLIM and Who uses it?
CAN SLIM is the acronym for a stock trading system which captures big price moves in stocks with strong fundamental earnings performance led by new products or new management teams in a growing industry (usually healthcare, technology, retail or other new emerging sectors). An essential part of the system involves Market Direction and technical analysis using charts and volume patterns. It also looks at moving averages and base patterns. CAN SLIM attempts to buy stocks as it breaks above a trading range. It also strictly follows a cut-loss rule. Two famous patterns are the cup-and-handle patterns and the saucer pattern. CAN SLIM is developed by William O'neil, founder of Investor's Business Daily, Daily Graphs, Oneil Database, and author of How to Make Money in Stocks. Oneil's firm supplied institutional research to major funds like Fidelity Management and Research, T. Rowe Price, and many others. In his book, How to Make Money In Stocks, William O'neil claimed to have turned $5,000 to 200,000 in 1963, allowing him the funds to purchase a NYSE Exchange seat and start his database firm. In Market Wizards, he claimed he averaged annualized performance returns of 40 percent or more. The real-time portfolio he started managing in Harvard showed returns slightly below 20%.
One of the criticisms against CAN SLIM is that the cut-loss strategy does not leave a lot of room for error. 5 successive 8 percent losses equals 50% loss. And it will take a 100% gain to get back to break even. Another criticism is that short-term taxes take a big portion of the gains so that after taxes and commissions, the CAN SLIM system cannot generate after-tax returns much better than a value system.
Dr. Van Tharp, psychologist to many top winning traders such as Richard Dennis, mentioned the CAN SLIM in the book, Trade Your Way to Freedom, had a mixed view of CAN SLIM. He believed that CAN SLIM is a great system in stock picking. However, Dr. Van Tharp's philosophy is all about expectancy and money management. In effect, he thinks stock-picking systems are not as important as the money management used by the system. In William O'neil's CAN SLIM, he advocated a cut-loss strategy. He claims he would never let a stock's loss to drop below 8 percent.
Nevertheless, the system has been used by successful traders like: David Ryan who won the U.S. Investing Championships in 1985, 1986 and 1988; Cedd Moses who won the U.S. Investing Championship in 1991; Lee Freestone who won the U.S. Trading Championships in 2003 and 2004. Norm Zadeh, founder of the U.S. Investing Championship and a former professor and professional gambler, once attributed the success of many of his contest winners to CAN SLIM. Even Jim Cramer, host of the Mad Money Show, and a former hedge fund manager who achieved 20+% annualized gains before retiring has laid much praise on William Oneil and his products.
CAN SLIM readers tend to use the Investor's Business Daily newspaper to follow the system closely. Investors Business Daily claims to have warned readers of the 2002 bear market and also the 2008 bear market. In its survey of readers, it claims that 60% of the readers avoided the big drop in 2008.
Several books have been written about CAN SLIM.
How to Make Money In Stocks, How to Make Money By Selling Stocks Short, Market Wizards to name a few.
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