Introduction
You invest in the stock market to build wealth, yet you likely find yourself losing money despite working hard. You buy stocks that look cheap, only to watch them fall further while you hope for a rebound. You sell your winning stocks too early to lock in small gains, and you hold onto your losing stocks until small mistakes become devastating losses. Without a proven system, you rely on emotion, tips, and guesswork.
William J. O'Neil argues that you can achieve superior investment returns by studying what successful growth stocks did in the past. The central idea of How to Make Money in Stocks is that winning stocks share specific fundamental and technical traits before they make massive price moves. By studying every market leader from decades of stock market history, the author developed a disciplined, repeatable methodology that removes emotion from the investment process.
The CAN SLIM investing system combines rigorous fundamental analysis of earnings and innovative products with strict technical market timing and stop-loss rules to identify and trade market-leading growth stocks.
This book provides a complete framework to transform how you approach the market. You will learn how to find companies with accelerating earnings and groundbreaking products before institutions buy them in volume. You will discover how to read stock charts to pinpoint exact entry points when price consolidation bases break out. You will also learn how to measure the general market direction, protect your capital with strict sell rules, and manage your portfolio like a business.
The book answers critical questions about navigating the stock market:
- How do you identify true market leadership before everyone else notices?
- What specific chart patterns signal that a stock is ready to break out?
- When should you buy, and more importantly, when must you sell to cut your losses?
- How do you determine whether the general market is in a confirmed bull or bear phase?
- What psychological traps must you conquer to stop letting your ego override objective rules?
1. The Grandmaster of Growth Investing
You cannot succeed in the stock market by relying on random tips or gut feelings. You need a proven, systematic approach built on hard facts and historical evidence.
William J. O'Neil built a premier financial research empire by combining exhaustive historical research on past market winners with disciplined work habits.
Founding Investor's Business Daily
Bill O'Neil started his career as a stock broker in 1958. He studied legendary traders and stock market winners going back to 1950 to uncover their shared fundamental traits.
This research formed the foundation of the CAN SLIM Investing System. It also led him to create several essential analytical tools for modern investors:
- Daily Graphs
- O'Neil Data Systems
- Investor's Business Daily
- MarketSmith
Bill O'Neil bought a seat on the New York Stock Exchange at the age of 30, making him the youngest to do so at the time. He later launched Investor's Business Daily in 1984 as the first national daily newspaper exclusively focused on stocks. His earlier ventures included Daily Graphs, created in 1972 as a weekly printed book of stock charts, and O'Neil Data Systems, founded in 1973. He was also accepted to Harvard Business School's first Program for Management Development in 1960.
The Power of Pattern Recognition
You can train your mind to spot the exact setups that precede major price surges. Master investors develop a near-photographic memory through deep study of historical chart patterns.
O'Neil's greatest gift is his ability to flip through stock charts on weekends and instantly recognize when a current setup matches past winners.
One hundred charts annotated with chart patterns and market trends are featured in the beginning pages of How to Make Money in Stocks to help users train their pattern recognition skills. These examples teach you to recognize the cup-with-handle base pattern, the double bottom base pattern, and the flat base pattern.
2. Stock Selection Criteria
The CAN SLIM system identifies leading growth stocks by isolating seven fundamental and technical traits common to past market winners.
The strategy evaluates current quarterly earnings growth, annual earnings growth, new products or price highs, supply and demand dynamics, industry leadership, institutional sponsorship, and general market direction. You can use tools such as the IBD 50 and Stock Checkup to find these rare candidates.
Current and Annual Earnings
The first two letters of the acronym represent current quarterly earnings and annual earnings. You should target companies showing accelerated performance before buying shares.
- C: minimum quarterly earnings increase required of 25%.
- A: minimum annual earnings increase required of 25%.
- Return on equity: minimum requirement of 17%, with big market leaders often showing 30%, 40%, 50% or higher.
Stuart Auvian used the IBD 50 to find Alexion Pharmaceuticals with earnings growth of 48% and sales growth of 44%, buying in December 2011 and selling for a 20% gain.
New Products and Institutional Sponsorship
The 'N' in CAN SLIM highlights the importance of finding newer companies with innovative products, fashion trends, or fads that drive massive consumer demand. Companies introducing groundbreaking products generate high sales and earnings growth, attracting heavy institutional sponsorship and driving exceptional stock price appreciation.
Dave Whitmer bought Green Mountain Coffee Roasters after recognizing the high consumer demand for the Keurig Brewer and K-Cups, securing a 78% gain and a 37% surge on a Walmart availability announcement.
Institutional investors such as mutual funds, banks, and pension funds require high daily dollar volume to establish large positions safely, making liquidity a key ingredient alongside explosive fundamental growth. Jim Roppel targeted stocks like Baidu and NetFlix that combined immense institutional sponsorship with triple-digit quarterly earnings and sales increases. Target companies with liquidity thresholds of 1 million shares per day and average daily dollar volume of $200 million or higher.
3. Chart Patterns and Entry Points
Prior to major price advances, leading stocks form recognizable base patterns. Buying during a breakout from these patterns prevents the risk of buying an extended stock that is vulnerable to a pullback.
Buying stocks as they break out of proper price consolidation bases on heavy volume increases the probability of successful trades.
Ted Staub bought Web.com Group after it began moving up on heavier volume in June, locking in a 25% gain in July.
You must look for specific formations before committing your capital:
- cup-with-handle pattern;
- double bottom base;
- flat base;
- three-weeks-tight pattern.
Each structure requires trading volume on a breakout to be 40% higher than average. A three-weeks-tight pattern requires the maximum closing price range difference during the pattern to be within 1%.
High Tight Flags
High tight flags are rare chart formations occurring after massive initial advances that signal the potential for explosive continued gains.
When a stock experiences a rapid price advance of 100 to 200% fast advance in 4 to 8 weeks followed by a tight sideways consolidation of 3 to 5 weeks sideways movement, it forms a pattern seen only in the market's absolute biggest winners.
Mike Hicks recognized a high tight flag formation in Taser, bought back into the stock, and patiently held through volatile daily swings to secure a massive gain of 294% gain in Taser.
4. Market Timing and Trend Analysis
Investors must respect the general market trend and time their market participation, as three out of four stocks follow the overall direction of the market.
Failing to recognize bear markets or trying to fight the overall downward trend leads to catastrophic losses. Conversely, getting positioned early in a new bull phase allows investors to capture leading growth stocks. A confirmed uptrend provides the safest environment for buying stocks.
Spotting Follow-Through Days
You must monitor macroeconomic signals and wait for a successful follow-through day before investing heavily. A follow-through day is signaled when a major index rises 1.5% or more on increased volume. Volatility subsides after this event, and high-quality names begin to break out.
Within 4 weeks of a follow-through day, new high-quality names break out. Gennady Kupershteyn learned to monitor market direction closely after giving back gains by ignoring market corrections due to an overly optimistic bias.
Monitoring Distribution Days
An accumulation of distribution days signals institutional selling and warns of an impending correction. You should watch for specific index actions that reveal heavy institutional selling:
- an index drop of 0.2% lower on volume higher than the previous day to qualify as a distribution day;
- an accumulation of 5 to 6 days of distribution over a 4 to 5 week period that turns an advancing market into a decline.
Jim Roppel and Kevin Marder moved their accounts to a 100% cash position ahead of major market crashes in 2000 and 2008, preserving capital while others suffered steep drawdowns. Scott O'Neil closed all long positions in November 2007, avoiding the 2008 market crash while the S&P 500 fell more than 50%.
5. Risk Management and Sell Rules
Capital preservation through strict stop-loss rules is more critical for long-term survival than trying to maximize every gain.
You must enforce a strict rule to cut losses at 7% to 8% below the purchase price. This prevents devastating drawdowns and stops emotional rationalization during market downturns. In a volatile market, you should tighten this threshold to 5% to 6%. Selling a losing position must become an automatic reflex executed through predetermined brokerage stop triggers to remove emotion and hesitation.
To succeed in the stock market, you must keep all losses small by cutting them at no more than 7 to 8% below the purchase price.
Preservation of capital is critical because steep losses require exponentially larger gains just to break even. A 25% loss requires a 33% gain to break even. A 33% loss requires a 50% gain to break even. A 50% loss requires a 100% gain to break even. Holding onto losing stocks risks devastating account drawdowns and ties up capital in laggard stocks instead of letting it flow into winners.
Many investors suffered massive losses during the 2000-2001 and 2007-2008 market implosions because they failed to switch from an offensive mindset to a defensive capital preservation mindset. Aloha Mike suffered 25% to 40% losses when his ego led him to break the standard 7 to 8% rule before he recommitted to strict loss management. Kevin Marder held Microsoft after a failed breakout and watched it fall 20% before selling, teaching him never to violate the 7-to-8% stop-loss rule.
Taking Profits at Twenty to Twenty-Five Percent
Most stocks should be sold when they achieve a 20 to 25% profit, unless they advance rapidly within a short timeframe. You should take profits at a 20 to 25% gain because many stocks will slow down, consolidate gains, and build a new base at that point. An exception requires holding a stock for at least eight weeks if it surges 20% within two to three weeks after a breakout.
Barbara James paid off her house and car loans using profits from the 1990s and consistently used 7 to 8 percent stop-losses and 20 to 25 percent profit targets. Lee Tanner achieved a 140% gain by applying the eight-week hold rule to Crocs in 2007 after it surged quickly following an IBD New America mention.
6. Advanced Holding Strategies
Mastering advanced holding rules, taking profits systematically, and compounding gains are essential for portfolio growth.
You should capture 20% to 25% profits during a bull market to compound returns, while applying specialized rules like the 8-week holding rule for explosive breakouts. You must master portfolio management and holding rules to turn modest trades into substantial wealth.
The Eight-Week Holding Rule
The 8-week holding rule requires you to hold a stock for at least eight weeks if it runs up more than 20% in less than three weeks. This rule protects your initial profits during massive breakouts. Exceptional market leaders often display explosive early momentum that demands patience from you.
Jason D'Amore utilized a three-weeks-tight pattern to buy shares of Lululemon after discovering the company through IBD's radio show. You can apply Leaderboard tools and Level 3 Workshop insights to spot similar setups.
Sitting Through Intermediate Pullbacks
Capturing massive multi-hundred percent gains requires the patience and discipline to sit through normal intermediate pullbacks of 20 to 25 percent.
Truly exceptional market leaders typically experience multiple pullbacks to their 50-day moving average during a massive run. You must maintain your core position rather than selling prematurely during these routine corrections.
Jim Roppel held Baidu through multiple corrections and made nearly $30 million by staying disciplined through major price swings. You can capture a 1,000% move only if you avoid the temptation to sell too early.
7. Technical Indicators and Leadership
Standard market indexes like the S&P 500 can mask the internal health of individual equities. You need specialized technical indicators to reveal whether institutional investors are backing the true leaders or hiding in fading laggards.
Utilizing relative strength lines and custom leadership indexes allows investors to pinpoint true market outperformers.
The Relative Strength Line
The Relative Strength Line
The slope of a stock's Relative Strength line indicates whether it is outperforming or underperforming the broader market indexes. An upward-sloping RS line hitting new highs shows that the stock is beating benchmarks like the S&P 500 and exhibiting true market leadership. Conversely, downward-sloping lines indicate laggards.
Kevin Marder and Jim Roppel closely monitored the RS line to confirm institutional accumulation in breakout leaders like Baidu. You can avoid weaker stocks by filtering out any candidates whose RS line lags behind the general market trend.
Building a Leaders Index
Building a custom index of leading stocks provides an objective daily gauge of overall market health and prevents trading in weak environments. Investors can track the market's internal strength by compiling 20 to 25 strong stocks across multiple industry groups and updating them daily to confirm if a true market uptrend is underway.
Jerry Samet created his own leaders index composed of 20 to 25 stocks from 15 industry groups to determine if the market was in a healthy phase.
If a stock temporarily breaks below a key moving average on heavy volume and triggers a sell, traders should buy it back the same day if it reclaims that benchmark. Large institutional players often support positions at benchmark lines like the 50-day moving average. A rapid recovery on high volume indicates institutional defense and renewed strength.
Jim Roppel instituted a strict rule to re-enter Ascend Communications on the same day after getting shaken out when it retook the 50-day moving average.
8. Investor Routines and Watchlist Management
Consistent profitability requires developing a disciplined daily and weekend routine focused on maintaining focused watchlists and screening for institutional accumulation.
You should allocate time to review market pulses, monitor proprietary screening lists like the IBD 50, study historical chart patterns, and participate in local or online educational communities. Maintaining a structured routine ensures you never miss a market transition or a top-performing breakout candidate.
Daily and Weekend Research Habits
You need to establish clear time commitments for your portfolio work:
- spend 20 minutes on your recommended daily routine duration to check trends and leading stocks;
- dedicate 1 hour to your recommended weekend routine duration for updating watch lists and studying charts.
Ken Chin spends evenings reviewing the print edition of IBD and checks Stocks on the Move during workday breaks to spot institutional buying. You can achieve similar focus by keeping your tracking lists concise. A typical watchlist contains 1 to 30 leading stocks, while your actionable buy list should hold only 1 to 5 actionable stocks.
Tracking Institutional Sponsorship
You must utilize specialized tools to monitor volume changes and institutional sponsorship. You can watch the Market Wrap Video, read Daily Stock Analysis, review Stock Spotlight features, and study The New America to find emerging concepts. Participating in IBD Meetup Groups also connects you with other practitioners.
Ashish Dave focused strictly on the top 25 names in the IBD 50 with low debt and high return on equity, targeting a preferred return on equity threshold of 35%. He found SolarWinds in October 2011 for a 122% gain through mid-September 2012. Kevin Dai achieved a 580% five-year cumulative return after joining an IBD Meetup Group and sticking to strict system rules.
9. Business Discipline and Post Analysis
Trading must be treated as a rigorous business rather than a casual hobby, supported by a formal written plan, monthly reviews, and objective post-analyses.
Treating trading professionally involves maintaining meticulous records, evaluating past trades to eliminate recurring mistakes, setting automated brokerage orders in advance, and removing emotional decision-making. You can expect 25 to 50% yearly returns in a decent market when you apply strict discipline.
Paramjit Chumber applied his MBA background to establish a formal business plan with monthly performance reviews after realizing diversified value investing was diminishing his capital.
Maintaining a Trading Journal
By printing daily and weekly charts upon entry and exit, and reviewing them annually alongside a journal of market thoughts, you can eliminate repeated mistakes and target specific flaws.
Katrina Guensch maintains a regular journal of her market perspectives and prints charts for every buy and sell decision to build a comprehensive chart diary.
Charles Harris performed a post-analysis of his trades in December 1996 and created a Trading Manifesto that preceded a 1,500% gain over the next 18 months.
Back Testing and Historical Study
By rewinding historical market data using specialized platform features, you can construct theoretical watch lists and make simulated buy and sell decisions week by week to evaluate and improve your real-world strategy.
Lee Tanner used the date change feature in MarketSmith during Level 4 workshop training in 2004 to run simulated portfolios and compare theoretical results against his actual trading performance.
Tom Ellis created a spreadsheet indexing every cup-with-handle base and chart pattern found across the pages of How to Make Money in Stocks.
10. Trader Psychology and Ego Control
Successful trading requires putting personal opinions and ego aside to strictly follow the market's message and rules.
Never Fall in Love with a Stock
Investors must never become emotionally attached to a company or fall in love with a stock, because severe bear markets can erase large paper profits. Holding onto winning positions blindly during a market correction without adhering to exit rules destroys accumulated gains. You must treat stocks objectively, viewing them as temporary holdings rather than permanent attachments.
Kathy Phillips held a dream portfolio of tech titans like Cisco Systems, Intel, and Microsoft in the 1990s, but failed to sell during a bear market, giving back a large portion of her gains.
Avoiding Common Behavioral Traps
Buying stocks right before earnings announcements is a dangerous gamble that exposes you to severe unpredictable gaps. Purchasing shares immediately prior to an earnings release invites catastrophic risk because a disappointing report can trigger a massive downward crash.
Barbara James bought F5 Networks right before earnings, ignoring her own rules, and suffered a 26 percent drop when earnings disappointed expectations.
Successful investors must remain completely flexible, abandoning personal opinions and ego when the market direction shifts. Having an inflated ego and a constant need to be right destroys trading success. You must live in the moment, acknowledge when you are wrong, and instantly follow what the actual market trend and leading stocks are doing.
Bill O'Neil was bearish in 1999 prior to the final market run, but when a follow-through day occurred in September 1999, he completely changed his mind and followed the prevailing market trend.
Kevin Marder noted that successful lawyers often expect to clean up in the market but end up getting cleaned out instead because the market does not care about personal backgrounds or past successes in other fields.
10 Key Ideas
- William J. O'Neil built a premier financial research empire by combining exhaustive historical research on past market winners with disciplined work habits.
- The CAN SLIM system identifies leading growth stocks by isolating seven fundamental and technical traits common to past market winners.
- Buying stocks as they break out of proper price consolidation bases on heavy volume increases the probability of successful trades.
- Investors must respect the general market trend and time their market participation, as three out of four stocks follow the overall direction of the market.
- Capital preservation through strict stop-loss rules is more critical for long-term survival than trying to maximize every gain.
- Capturing massive multi-hundred percent gains requires the patience and discipline to sit through normal intermediate pullbacks of 20 to 25 percent.
- Utilizing relative strength lines and custom leadership indexes allows investors to pinpoint true market outperformers.
- Consistent profitability requires developing a disciplined daily and weekend routine focused on maintaining focused watchlists and screening for institutional accumulation.
- Trading must be treated as a rigorous business rather than a casual hobby, supported by a formal written plan, monthly reviews, and objective post-analyses.
- Successful trading requires putting personal opinions and ego aside to strictly follow the market's message and rules.