Today, we draft a little bit about stock trading record holder Dan Zanger. Dan turned $11,000 to $18 millions in 18 months, an unofficial world record on stock trading. Dan is kind of trader who likes to buy highly volatile stocks that are in the process of breaking out. He gets in quick and may stay in anywhere from a few hours to a number of days or in some cases, even weeks.

To understand more about Zanger, read “The Charts Know It All: Chart Pattern, Trading and Dan Zanger”, S&C reprinted article.

Using the premise 'cut losses short and let your profits ride' means that unless the trade goes against you at the beginning, it's hard to know exactly how long to hold the position. As long as it's moving up on volume, Zanger holds on.

The moral is that even on anticipated shorter-term trades of a day or so, it's important to have at least a rudimentary understanding of the fundamental strengths (and weaknesses) of a company because, if you are lucky, it will turn into a longer-term proposition.

Zanger combined his approach in chart pattern (on increasing volume) with CANSLIM stock selection. If the stock is acting frisky, there is generally a fundamental reason why; often institutions are accumulating the stock and the chart pattern is simply proof of this.

What's a CANSLIM?

Zanger is a believer of CANSLIM strategy, as this magic formula contains almost everything he needs to know about a company before buying it. There is a summary of the CANSLIM formula in William O'Neil's essential market bible called How to Make Money in Stocks: A Winning System in Good Times and Bad. O'Neil recommends that you buy only companies exhibiting certain fundamental and technical characteristics. Zanger has added some of his own criteria, and, interestingly, he has discovered over the years that stocks demonstrating interesting chart patterns on volume very often turn out to fulfill most if not all of the CANSLIM criteria.

Here is a summary of the CANSLIM criteria, including Zanger’s way.

C = Current Quarterly Earnings/Share Growth - In the book, O'Neil recommends, "earnings must be up 18 – 20%, the higher the better." Zanger requires double this as a minimum. O'Neil also recommends that quarterly sales be accelerating or up 25%. As well, Zanger looks for companies with both earnings and revenues that demonstrate a continual quarter-over-quarter sequential expansion, known as "ramping up." In retailers, however, he looks for year-over-year expansion (due to the seasonal volatility of the industry).

A = Annual Earnings Growth - O'Neil shows that winning stocks over the last 50 years had a return on equity (ROE) of 17% or more. Any CANSLIM-worthy stock should demonstrate this kind of ROE in each of the last three years. The higher the annual growth, the better the candidate.

N = New Products, New Management, and New Highs – The company should offer new products/services, with new management and/or industry innovations. A pivotal technical consideration of this point is to buy only stocks that are emerging from basing chart patterns and that have put in a new stock-price high out of the base or consolidation. Zanger looks for companies that have a global domination in their market space and that are also "under-known and under-owned." This means institution that don't yet have these stocks in their portfolio are to become major buyers, at which point they create demand for the stock and in turn push up the stock price.

S = Supply and demand in share volume/shares that float - The supply part (shares outstanding) is of less importance here than demand. The company should demonstrate increasing volume as price moves out of a basing chart pattern such as a cup and handle, saucer bottom, or head and shoulders bottom. Other patterns such as flags or pennants and bullish wedges also represent excellent buying opportunities when the breakouts are accompanied by greater-than-average volumes. Other major factors are the total number of shares that the public can buy, and this is known as the float. A small number of shares that float means that fewer shares have to be bought to push up the stock price. Dan likes to see stocks with 3 million to 100 million shares that float. TASR, one of Dan's big winners in 2003-2004, started out with just 3 million shares that floated on its 5000% run in one year.

L = Leader (or Laggard)? - Buy market, sector and industry leaders. Sell laggards. Own the industry leaders and sell them when they no longer lead. This also applies to the sectors and groups in which they reside.

I = Institutional sponsorship - Look for stocks with a good degree of institutional (= professional) participation. This includes those with a higher degree of corporate executive ownership.

M = Market direction - As much as 70% of a stock's price movement is determined by the direction of the overall market. Even a winner will be fighting a strong current to get to higher prices in a market that is tanking. It is best to be long winners in a bull market (and short losers in a bear market).

Study more about Dan Zanger, visit his site here.