World Record Trading Returns!
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Today we take a look at the world record holding trader, Dan Zanger.
Although not an author, Dan is very highly regarded and has appeared in numerous literatures, he also produces the Zanger report on the website; chart pattern dot com. Dan however gained notoriety for record holding returns when he turned just over 10,000 dollars into 18 million dollars in under two years. His returns hit the media spotlight soon after the performance was audited and proven through his IRS records.
Let’s take a look at how Dan achieved such gains and learn from the method which he continues to use to this day.
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Dan was raised in the San Fernando Valley of Los Angeles. He later began college but dropped out to eventually become an independent contractor, building swimming pools throughout California.
In 1997 Dan sold his car for $11,000, with the sole goal of using the capital to become a full-time stock trader. He soon created millions from his investment and left contracting behind for good.
In the years prior to making his fortune, Dan studied the works of William O’Niel, cementing a bias towards specific chart patterns accompanied by increases in volume. Dan himself said, -
“Over the last twenty-five years, I've spent over 30,000 hours studying every type of chart pattern formation imaginable. From Cup and Handle patterns to Falling Wedges, Ascending Triangles, Bull and Bear Flags and too many others to list here now, and lucky for us these patterns repeat over and over and over again!”.
Recognised primarily as a momentum trader, Dan applied his strategy during the Tech bubble era, whilst applying considerable leverage.
The results he achieved were audited by a company called Effron. We can see here a letter Dan received from Effron confirming his results, the audit confirmed an astonishing return of 29,223%. This dwarfed the S&P 500 index return of just 23% over the same period.
Clearly, returns of this magnitude do not come without significant risk, but just how much risk did Dan take? How close was he to blowing up his trading account?
When asked about risk, Dan is quite vague. Although in October 2000 his account dropped by as much as 32% in one day, and at one point during a bear market his portfolio had a drawdown of 75%. To say he is more of an offensive rather than defensive trader is probably accurate.
Although when asked about managing risk, Dan said: -
“If a stock doesn’t accelerate quickly out of a basing area, then I’ll sell the stock promptly during that first day. I’ll do this even if I’ve been in the stock for only 20 minutes, regardless of profit or loss at that time. If a stock isn’t moving up sharply right away, then the trade must be wrong.”
Additionally, when asked about selling a more mature position, Dan said: -
“I never use trailing stops, but I will sell a position of strong stocks moving up quickly or for long periods of time”.
This would imply the use of mental stops as opposed to entering a firm stop loss order into the market. In essence, Dan relies heavily on discretionary decisions when it comes to managing positional risk. Such an approach requires immense discipline.
Let’s move on to the specific chart patterns Dan uses to find what he calls explosive stocks.
This first chart is from the company; Internet Capital Group and shows the trades made by Dan during his world record return.
The patterns he often looks for and recognised in this example were areas of consolidation.
The stock was an Initial Public Offering back in August 1999, trading at $30 per share. A couple of weeks passed, and Dan noticed a small descending trendline forming, the price soon broke above, and he quickly took a position.
Dan sold his position as soon as the stock lost its upward trajectory.
Several weeks later the stock formed a horizontal trendline, and once again Dan entered at the break.
The stock continued its surge before losing its momentum at over $190 per share, Dan seen the shift in momentum and again sold his position.
True to form, the stock consolidated again for several weeks into what Dan called a high-level symmetrical triangle.
Dan entered a position on the break and sold on the first considerable sign of a change in momentum.
These chart patterns were typical examples of the type Dan traded throughout the two-year period, and when asked how many trades of which type he took, Dan said: -
“There were so many of them in that two-year period it’s impossible to remember all of them. It must have been at least 200 trades or more”.
Another stock Dan bought over the same period was an internet company called Ask Jeeves.
Dan described this setup as a very bullish flag pattern, commonly known as a bull flag, and is unsurprisingly described as such due to its resemblance to a flag.
In this example, Dan saw a consolidation in price over a 7-day period, followed by a surge through the resistance line. He bought shortly after the break and watched carefully for obvious signs of a trend reversal.
The price continued its upward trajectory and tripled in price to approximately $190 per share. The price eventually lost all its momentum and Dan sold his entire position.
Bullish flags like this are known to be one of the most reliable continuation patterns available.
To get a better understanding of Dan’s trading strategy we look at 9 of his golden trading rules.
The first rule is to ensure the stock has a well-formed base or pattern such as the examples we just covered.
Next, having established the trend or resistance line, enter a position after the price has broken the line but do not pay more than 5% above the breakout.
Be quick to sell the stock should the price drop below the breakout point, which Dan alludes to being a 5 to 7% stop loss.
Fourth, as the stock rises, sell between 20 to 30% of a position once the stock has climbed between 15 to 20% from the breakout.
Number 5. Hold the stocks which continue to rise and sell those that lose momentum or begin to turn down. Dan adds: -
“Remember stocks are only good when they are moving up”.
Six. keep an eye on strong industry groups and where possible try to make your selections from within these groups.
Seven. Look for reversal patterns to exit your positions. Dan recommends the candlestick patterns which Bulkowski provided in depth research on as a good starting point.
Eight. Volume is highly important to the success or failure of your trading decisions, look for healthy volume at the point of breakout.
And finally, Dan says: -
“Never go on margin until you have mastered the market, charts and your emotions. Margin can wipe you out”.
Dan’s Zanger report can be accessed in the link below through a 2-week free trial, and we can see here a list of some of his recommendations offered in the report from 2019. For those looking to dig deeper into his strategy, you can check the ticker and date of selection to look at the setups in more detail.
From this list we can see his average return from each selection was 52%, and his average holding time was 4.92 weeks. The selections are obviously cherry picked as examples, but it can give you a better idea of what to expect from some of the better performing stocks.
Dan summarised his concept best when he said: -
“Trading for me is all about volume and price action. I buy on pattern breakouts when volume is rising, and as long as price is responding well to increasing volume, I stay on board, but when either price or volume stops rising, it’s time to get out”.
Let’s look at the other chart patterns Dan uses and reveal the obvious commonalities between each.
First, we have the Flat Base Pattern. A consolidation, and a break above resistance with increasing volume.
Next, an Ascending Triangle Pattern. A contraction in volatility, and a break above resistance with increasing volume.
Finally, a Symmetrical Triangle. A contraction in volatility, and a break above resistance with increasing volume.
These are just more examples of the many chart patterns Dan trades, but they all have the same traits: Consolidation, volume increases, lines of resistance and a breakout of resistance.
In summary, Dan created immense wealth by adopting breakout strategies at a time when the tech industry was exploding at an extraordinary rate.
Luck, genius, or a combination of both?, I’ll let you decide….
Financial Wisdom
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