Mark Minervini’s Momentum Trading Strategies
Mark Minervini is a popular stock trader and two-time US Investing Champion (1997, 2021) known for his exceptional returns and risk management.
His approach combines technical and fundamental analysis into a strategy for identifying and trading high-momentum stocks.
Let’s explore the key components of Minervini’s trading strategy.
Key Takeaways – Mark Minervini’s Momentum Trading Strategies
- SEPA System
- Use Specific Entry Point Analysis to identify optimal buying opportunities in stocks showing upward price trends, improving fundamentals, and a catalyst for wider market attention.
- Trend Template
- Look for stocks above key moving averages (50, 150, 200-day), with the 200-day MA trending up, and price within 25% of 52-week high but at least 30% above 52-week low.
- Growth Focus
- Screen for stocks with accelerating earnings and revenue growth (15%+ annually, 25%+ quarterly) and improving profit margins.
- Risk Management
- Use strict position sizing, use stop-loss orders, and have clear profit-taking rules to protect capital and lock in gains.
Who is Mark Minervini?
Mark Minervini left school at 15 to pursue his passion for trading stocks.
Influenced by successful traders like Jesse Livermore, Richard Love, and Stan Weinstein, Minervini developed a unique approach that has proven effective over the years.
Achievements
- Won the US Investing Championship in 1997 with a 155% return
- Repeated his victory in 2021 with a 334% return
- Consistently achieved high returns while maintaining strict risk management
Minervini’s success challenges the Efficient Market Theory, demonstrating that it’s possible to achieve above-average returns through skilled analysis and disciplined trading.
The SEPA Ranking System
At the core of Minervini’s strategy is the SEPA (Specific Entry Point Analysis) system.
This approach is based on three key assumptions:
Timing matters
There are optimal periods for buying stocks.
Predictability exists
Potential big winners can be identified before significant price increases.
Exponential growth is possible
Proper trading of these stocks can lead to gains.
SEPA Key Elements
Trend
Momentum traders typically believe that stocks poised for significant gains typically show a pre-existing upward price trend.
Fundamentals
These stocks often exhibit improvements in sales, earnings, and margins.
Catalyst
A trigger event often propels the stock to wider market attention.
Entry Points
Specific price points offer optimal risk/reward ratios for entering positions.
Some might use support/resistance levels.
Some might use certain options expiries where hedging arrangements often cause consolidation or pinning behavior, yet represents a good entry point (the stock is fairly valued or undervalued based on its earnings).
Exit Points
Clear rules for both limiting losses and securing profits.
The Trend Template
Minervini’s Trend Template is a set of technical conditions that a stock must meet to be considered a potential trade.
These rules form the foundation of his strategy:
Moving Averages
- Stock price above 50-day, 150-day, and 200-day Simple Moving Averages
- 200-day moving average trending up for at least 1 month (preferably 4-5 months)
- 50-day moving average above both 150-day and 200-day moving averages
- 150-day moving average above 200-day moving average
52-Week High and Low Rules
- Current price at least 30% above 52-week low
- Current price within 25% of 52-week high
Relative Strength
- Relative strength ranking no less than 70, preferably in the 80s or 90s
Fundamental Analysis
While technical analysis forms the basis of stock selection, Minervini also emphasizes the importance of fundamental factors:
Earnings and Sales Growth
- Strong and accelerating growth in earnings and/or sales
- Quarterly results that exceed analyst expectations (earnings surprises)
- Positive revisions to future earnings estimates
Profit Margins
- Positive trend in profit margins over time
- Indication of pricing power and efficiency
Screening for Potential Trades
Minervini’s approach involves multiple screening steps to identify potential trades:
Screen 1: Yearly Earnings Growth and Acceleration
- EPS growth of at least 15% annually over the past three years
- Acceleration in EPS growth in the last full year
Screen 2: Quarterly Earnings Growth and Acceleration
- EPS growth of at least 25% quarter-over-quarter
- Acceleration in EPS growth over the last two quarters
Screen 3: Yearly Revenue Growth and Acceleration
- Revenue growth of at least 15% annually over the past three years
- Acceleration in revenue growth in the last full year
Screen 4: Quarterly Revenue Growth and Acceleration
- Revenue growth of at least 25% quarter-over-quarter
- Acceleration in revenue growth over the last two quarters
Additional Screens
- Combinations of EPS and revenue growth and acceleration
- “Code 33” alert: acceleration in earnings, revenue, and profit margins over three quarters
Manual Review Process
After creating a watchlist through screening, Minervini emphasizes the importance of manual review:
- Analyzing the stock’s industry and sector performance
- Identifying potential drivers for future growth
- Reviewing management commentary and outlook
- Conducting detailed chart and volume analysis
- Assessing stock liquidity
Market Leaders and Sector Analysis
Minervini places significant emphasis on identifying and following market leaders:
Characteristics of Market Leaders
- Strong growth within their sector or industry
- Often show the fastest percentage gains in early bull markets
- May be overlooked by some traders/investors due to initial price rises
Sector and Industry Analysis
- Ranking stocks within sectors based on specific criteria
- Monitoring new 52-week highs and lows by sector
- Using a Bottom-Up approach to identify leading stocks before broader market trends
Risk Management
An important aspect of Minervini’s strategy is his approach to risk management:
Position Sizing
- Determining appropriate position sizes based on account size and risk tolerance
- Using a maximum risk percentage per trade
Stop-Loss Placement
- Setting initial stop-loss orders to limit potential losses
- Adjusting stops as the trade progresses to protect profits
Profit Taking
- Establishing clear rules for taking profits
- Balancing between letting winners run and securing gains
The Bottom-Up Approach
Minervini advocates for a Bottom-Up approach to stock selection:
Benefits of Bottom-Up Analysis
- Identifies leading stocks before broader market trends become apparent
- Allows for earlier entry into potentially explosive moves
Focus on Stage 2 Stocks
- Looking for stocks consolidating in stage 2 of their trend
- Anticipating breakouts from these consolidations
Practical Application of Minervini’s Strategy
To apply Minervini’s strategy effectively:
- Start with the Trend Template to identify stocks in strong uptrends
- Apply fundamental screens to find companies with strong growth
- Conduct manual review of potential candidates
- Monitor market leaders and sector performance
- Use proper position sizing and risk management techniques
- Enter trades at optimal entry points identified through SEPA
- Manage trades actively – i.e., adjusting stops and taking profits as needed
Learning and Adaptation
Minervini emphasizes the importance of learning and adaptation:
- Studying past winners to identify common characteristics
- Keeping detailed trading journals to analyze performance
- Staying updated on markets and adjusting strategies as needed
Practice
Like anything else, practice is key.
Whatever it is, you have to do it over and over again to get good at it.
Once something is effective, then you can iterate to keep the trajectory going forward.
Those who are technically inclined can put this approach into code and backtest it.
Conclusion
Mark Minervini’s momentum trading strategy offers an approach to identifying and trading high-potential stocks.
By combining technical analysis with fundamental growth metrics, Minervini has developed a system that has proven successful over many years.
The key to his approach lies in the application of the Trend Template and fundamental screens, coupled with risk management (i.e., position sizing, stop-loss, profit-taking levels).
Focusing on stocks showing both technical strength and fundamental growth allows traders to increase their odds of identifying potential big winners before they make significant moves.
However, it’s important to note that successful implementation of this strategy requires dedication, practice, and a willingness to adapt.
As with any trading approach, proper risk management is important, and traders should always be prepared for variance in their results.