Don't Stray From Any CAN SLIM Investing Rules

Investor's Business Daily

Some people are natural tinkerers. That's great in some fields. But when it comes to using the investment method, resist the urge to deviate from the system.

With CAN SLIM, why mess with a good thing by straying from a complete set of sound rules? IBD founder and Chairman Bill O'Neil has done the hard work for you. Just follow the road map that he laid out.

CAN SLIM is a tried and true investment system based on how the market really works. It's based on the study of the biggest stock market winners during market cycles over the past 100 years.

"To be a big success in the stock market, you need definite rules and a profit-and-loss plan," wrote O'Neil in the investment classic ".

The stock market is not something investors can wing and become successful at, especially in the long term.

IBD rules help you tackle just about every aspect of investing. There are rules to follow on buying, selling, portfolio management and market timing.

For example, when you buy a stock, the type of base it breaks out from should fit certain criteria. If a stock falls 20% and trades in a horizontal channel over the next three to four weeks, some investors may buy it once it goes into a new high.

But CAN SLIM investors will note that the pattern is too short and too deep to be a . It's basically not a proper buy setup in IBD's book.

In another situation, if a stock slices its 50-day line in huge after a long, spectacular run, that's a sell signal in CAN SLIM. But investors mixing rules might not sell since the stochastics or Relative Strength Index (RSI) indicator are now in deeply oversold territory and due for a bounce. Investors should never deviate from the rule of selling a stock once it goes 7% or 8% below your purchase price. Don't ignore this rule even if you disagree with it.

In the week ended July 8, 2011, Changyou.com (CYOU) cleared a 47.35 from a cup base, but reversed lower. The next week, the stock fell to 41.70, 12% below that proper entry. (1) It was selling time.

Although it bounced back and hit a new high, good times didn't last. Changyou.com again slumped more than 8% below the buy point. This time, there was no comeback. The stock plunged more than 50% below the 47.25 buy point by late November. (2)

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