The CAN SLIM Trading Method – Screening, Entry and Exit Methods
The CAN SLIM trading strategy seeks out growth stocks with solid fundamentals and strong price momentum. Learn how to find, enter and exit these trades, as well as see proof that this strategy far outperforms the S&P 500. We have also added in some alternative entry and exit methods which can sometimes provide better entry points and simpler profitable exits.
What is the CANSLIM Method?
What is your system for investing or trading success? What stocks do you buy, and how long do you hold them for? When do you get out of a loss? When do you take profits? What triggers your entry? If you can’t answer these questions, chances are you could be doing much better with your trading and investing than you are currently.
William O’Neill is the co-founder of Investor’s Business Daily – a financial research and media company. He’s also a former stockbroker, author, and creator of the CAN SLIM system–a trading strategy designed to find stock market winners. His book, How to Make Money in Stocks, has sold over 2 million copies and is well worth a read.
CAN SLIM is an acronym, one which came out of a study conducted by William O’Neill, on the best-performing stocks from the 1880s to 2008.
The CAN SLIM acronym highlights where to look for opportunities. It doesn’t address how to exit or enter trades. That will be discussed later in the article, along with ways to screen for these types of stocks.
What CAN SLIM Stands For
C: Current Quarterly Earnings
Earnings are key when it comes to choosing winners, and O’Neill especially emphasizes quarterly earnings growth.
O’Neill found from his study that the majority of top performing stocks had quarterly earnings growth of 70% prior to a major price increase. The one thing to take note of here though, is to be skeptical of the financial reports that companies put out – businesses have a lot of incentive to fudge the numbers and you’ll need to really delve deep to understand whether the stated growth is real or artificially inflated.
Just consider the case of Toshiba, a global brand that was caught perpetrating a billion dollar accounting scandal in 2015, inflating profits all the way back to 2008.
In addition to extremely strong quarterly earnings growth, keep your eye out for high sales growth of at least 25%. Sales drive earnings so you want to make sure there’s gas in the engine, so to speak.
Set minimum requirements: O’ Neil recommends only looking at companies with at least 20% quarterly earnings growth and sales growth north of 25%. This means avoiding stodgy old companies that are only growing a tiny bit each year and tend to have slow moving stock prices—these types of boring stocks aren’t going to produce many big winning trades.
Lastly, make sure to run a comparable company analysis for the sector or industry. 50% quarterly earnings growth looks good in isolation but what if the company you are looking at is actually at the bottom of the pile in an industry that is just taking off? If other companies in the same industry are growing by 70% or more, those may be better stocks to consider.
A: Annual Earnings Growth
While quarterly earnings growth covers the short-term potential, annual earnings growth gives one insight into the long-term potential.
It’s fairly easy for a company to conduct a one-time cost-cutting exercise that boosts quarterly growth but it’s harder to see that boost in growth over a long time frame, as measured by annual earnings.
A company like Bombardier, for example, can cover up their quarterly earnings by laying off thousands of staff and cutting labor expenses, but it’s just a short-term solution which doesn’t address the real problem – they aren’t selling enough planes.
O’Neill suggests that 25% annual earnings growth is the minimum threshold for investing in any company, while top stocks will post even better performance numbers than that.
When discussing earnings, people tend to ask about the P/E ratio (Price relative to Earnings). As a general rule, the best performing companies over the last 100+ years have had P/E ratios well above the average P/E of the S&P 500. This is because when buying companies with strong growth, they will priced higher (relative to current earnings) than all the other boring stocks out there. So P/E shouldn’t be used in making these types of trades, as a high P/E could mislead you into missing a great opportunity.
N: New Product, Service, Management, Price Breakout
Does the company have some sort of new product or service offering? What we are looking for is some kind of innovation that is the driver of the earnings growth we looked at previously. Think Apple when they introduced the iPhone.
Innovation creates excitement, and excitement drives stock prices. We don’t’ need to hold these stocks forever (exit rules will be discussed later), we just need to hold them while everyone loves them and is clamoring to get a piece of the action.
A new management can also shake things up, especially if they have innovative ideas and broadcast them, stirring up interest.
Finally, the stock price itself may bring about something new. A breakout from a consolidation or basing pattern (discussed in Entry Points below) on increasing volume is a technical change that is likely to draw in more buying interest (and shows there is interest already there!).
S: Supply and Demand
O’Neill recommends investing in stocks with a smaller amount of shares outstanding. It’s the idea of supply and demand – you want to focus on companies whose shares have a high amount of demand (as measured by trading volume) and a limited supply (measured by the number of shares outstanding).
Increasing volume of 40% or more on a breakout in price (discussed later) helps confirm there is demand.
The less shares outstanding, the bigger the impact each buy order has, which can lead to large gains. While there is no fixed rule that a company should only have 50 million shares outstanding, or something like that, but O’Neil does recommend that typically small cap stocks have the most explosive gains. These are new innovative companies, with fewer shares issued so when those shares are in high demand the stock price can skyrocket. If all else is equal, choose to trade the stock with 50 million shares outstanding instead of the one with 5 billion. With the latter, there is more supply (although this will be discussed a bit more in section I: Institutional Sponsorship).
Ultimately though, if a stock is moving very strongly and everything lines up for a good trade, then the number of shares outstanding isn’t a major concern. But you do want to see the demand increasing, as shown by increasing price volume on a breakout.
L: Leader or Laggard
Investors should buy companies that are the leader in their industry or sector, in terms or price performance.
O’Neill suggests identifying leaders through relative price performance. If a security’s 52-week relative price strength rating (RPSR) outperforms 80% of the market then it is a good bet that it is a market leader.
The stock you buy should be seeing overall better performance than its peers, and should definitely be outperforming (over the last 6 months to a year) all the major indexes (S&P 500, Dow Jones averages, NASDAQ, NYSE Composite, etc).
Look for strength when major markets are down. If the S&P 500 has been dropping for a week, and the stock you are looking at is holding steady (and it fits all the other criteria discussed in this article) that is a very good sign. When an entry signal occurs (discussed later), take it. If it doesn’t drop when the market is, you can expect a rally when the selling pressure on the market eases.
I: Institutional Sponsorship
Institutional sponsorship simply means that large funds in the financial industry are buyers of the company you are interested in. The “I” in CAN SLIM is a bit like the social proof aspect of stock picking. If the big boys and girls are interested then you should be too…because those big boys and girls can push prices up for you.
Not only is it a good sign when hedge funds, pension funds, and stock market legends are increasing ownership of the company but it’s even better when those players are ones who have a strong track record of outperforming the market.
One thing to be aware of is that if institutional investors really like a stock, then they’ll want to take large positions in order to make it worth their while. However, a large hedge fund like Soros Fund Management ($20+ billion in assets under management) can’t just pump half a billion dollars into a stock they like in one day, instead, they draw out their purchases over many weeks and even months. If you see this pattern then it’s a green light.
M: Market Direction
O’Neill breaks down market direction into three stages:
- Confirmed uptrend
- Confirmed downtrend
- Uptrend under pressure
Stocks tend to follow the market, with three out of four companies moving in the same direction as the market.
In other words, when the market is declining it’s going to be harder to pick a winner. In a confirmed downtrend, it is best to not even bother. Instead, focus on cutting your losers and wait for the next uptrend.
In a strong uptrend, take advantage of the opportunities that come along. Trade stocks that meet the criteria and provide the right entry signals without hesitation.
Does The CAN SLIM Strategy Work?
The CAN SLIM investing system is a rules-based system that mixes fundamental technical analysis with momentum investing principles. You want to make bets on companies with solid growth and a viable business model, while at the same time being sensitive to price movements and the actions of other investors in the market. This process allows us to ride the big price waves in momentum stocks.
What you may be interested to know is whether or not CAN SLIM is the real deal.
The back-tested results of the system are impressive.
Lutey, Crum, and Rayome tested the strategy against the NASDAQ 100 and found that it outperformed in both the short term (3-5 years) and the longer-term. In the fourteen years spanning 1999-2013, CAN SLIM outperformed the NASDAQ 100 by more than 10 percentage points (14.21% vs 3.82%). On average the authors found that the strategy generated 12% in alpha, which is excess return over a benchmark.
Furthermore, according to the American Association of Individual Investors, CAN SLIM returned 21.8% annualized between 2002 and 2017 (as of March 31st). This strategy crushed the S&P500, which returned 4.2% in the same period.
By this measure, an investor using the CAN SLIM investing strategy could turn $10,000 into nearly $200,000 over 15 years.
It must be pointed out though, that while the CAN SLIM strategy has rules (and we still have more to get to–on entries and exits), there are still subjective elements. What someone sets their earnings threshold at will affect which stocks are approved for trading. Opting to trade one stock over another could create a huge difference in performance if one of those stocks sees a meteoric rise. These back-tested statistics just help show that the method is viable. Strong traders who dedicate time to the method could well see returns in excess of 40% per year, while those who implement the strategy in a sloppy fashion could very well lose money.
The CAN SLIM Select Growth Fund (CANGX) is a mutual fund that invests at least 80% of its net assets in stocks that fit the profile of stocks selected through the CAN SLIM system. One must be aware, that while the back-tested CAN SLIM strategy destroyed the S&P 500 in a head to head battle, the CAN SLIM Select Growth Fund underperformed the market since its inception in 2006. This shows that it still matters who is pulling the trigger on the trades; knowing the acronym isn’t enough to produce profits–there is still a lot of fine-tuning that needs to be done to pick the best stocks, buy them right and get out at the right time.
Investors.com publishes a list of stocks that fit all the criteria laid down by the CAN SLIM investing system (paid feature, although a few are shown for free). It is unwise to simply buy the stocks on this list. Finding the stocks is only part of the battle. Next, we need to know WHERE to buy them and under what conditions, and then when to sell them.
Entering a CAN SLIM Stock
We look to buy CAN SLIM stocks after they have consolidated, pulled back, or formed a basing pattern, and then enter when the price breaks to new highs, or breaks higher out of a consolidation close to the highs (such as a breakout from the “handle” of a cup and handle chart pattern).
Since the goal of the strategy is to only be involved in the strongest of stocks, pullbacks, consolidations and basing patterns shouldn’t fall more than about 20% off the high before starting to move higher again. Often pullbacks will only drop 10% to 20% in very strong stocks. For example, if a stock is very strong and it just hit $50, the next pullback should ideally only be $5 to $7.50 ($45 to $42.50), before it starts moving up again. This shows there is still strong buying interest. If a price falls more than 30% off its high, it may be best to avoid the stock because that big of a decline shows potential weakness and a possible trend reversal.
A buy entry is taken right as the price moves above the prior high price (high price before the pullback or basing pattern) or as it breaks higher out of the consolidation within the pullback. Enter soon, and never chase the price. If the price has already rallied more than 5% above the entry point, before you see it, wait for the next buying signal. If you buy late, you have given up too much profit potential already.
The daily chart below is Applied Materials (AMAT)–a stock that fits the CAN SLIM criteria (or close to it), as of this writing, according to Investors.com–with entry levels marked. Note that O’Neil often used weekly charts, and found that the various types of pullbacks in these strong stocks typically lasted 4 to 8 weeks, but they may be longer. There are a number of patterns outlined in O’Neil’s book to look for; not all of them are shown on the chart.
On one occasion two entry points are marked, with the lower one being a consolidation breakout near the former high, and the higher entry point a break to new highs. The goal is to enter as the price is moving up as soon as there is enough confirmation to do so. Fine-tuning the entry point could mean making a few extra percent on each trade, which can mean a huge difference in performance over the long-run.
In How to Make Money in Stocks, O’Neil outlines lots of specific details on what patterns should look like, the different types of pullback patterns you should trade, and when these patterns should be avoided. To master the method, reading (and studying and practicing) the book is recommended.
Rudolph Technologies (RTEC), another CAN SLIM stock (close to the criteria) at the time of writing, shows some different types of pullbacks and entry points.
Adding to Positions
Mr. O’Neil believes is pyramiding. That is adding to positions that show good movement. If a stock is entered and it continues to move favorably after entry, buy more (but fewer shares than you originally purchased). Add more shares automatically if the price moves 2% to 3% above the entry price.
For example, let’s assume you have an entry signal are $45.50. You buy 500 shares are $45.51. The price continues to rise to $46.42 (2% above entry point), there you can add another 300 or 400 shares. If another buy signal occurs while you are still in the position, you can add to the position again. Continue to decrease the number of shares bought at higher prices though, as this keeps the cost base for the trade low.
Assume the stock continues to rally unabated to $50. There it forms a tight consolidation for a few weeks, but never really drops. When the price breaks to the upside out of that consolidation, by another 200 shares, etc. This can continue until the trade is closed, or you have run out of capital to purchase more stock (or the commissions become too large for the smaller and smaller position sizes).
O’Neil is not big on diversification. Traders with small accounts can use utilize all their capital in 1 or 2 of their best stock picks. Traders with larger accounts can spread their capital over 3 to 7 of the best stocks/setups they can find. Keep this in mind when determining how much capital to allocate to each stock. Stocks that don’t perform well can be sold (discussed below) and that capital can be used to pyramid into the stocks that are performing well.
When to Sell A CAN SLIM Stock
Mr O’Neil provides a few guidelines in How to Make Money in Stocks, on when to get out of a trade. There are rules related to getting out of losing trades, and rules related to taking a profit.
- Never let the price of a stock drop more than 8% below the purchase price. If it does, you are wrong–cut the loss and put that money toward other trades (may re-enter if everything still looks good and a trade sets up again at a later time).
- The maximum you should allow a stock to go offside is 8%; you can cut losses before that though if the stock isn’t acting right or is weak compared to other positions.
- Funnel money from weak or losing positions (that you sell) into positions that are performing the best.
Here are the guidelines for taking profits.
- If a stock has moved more than 20% in your favor after entry, don’t let that stock turn into a loser. If it starts dropping, take the small profit just above the entry point.
- After a strong stock breaks out from a basing pattern, it will often run 20% to 25% before a significant correction. Consider exiting when you are showing a 20% to 25% profit (assuming you entered at the correct time, right as the price was completing the basing pattern).
- An exception to the rule above is when the price rallies more than 20% within the first three weeks of the trade. If this occurs, hold the trade for at least 8 weeks. Within 8 weeks there is usually at least one decent sized (often about 10%) pullback. By holding for 8 weeks the trader is forced to hold through this pullback and likely start to see the price start rising again for an even larger gain.
- Most stocks are sold for the 20% to 30% profit. Some are held for 8 weeks. At the 8 week point, a trader than determines if they wish to sell that stock or hold it for 6 months or more. As long as the stock is performing very well and continues to meet the criteria of the strategy, it can be held. While Mr. O’Neil outlines many tools to aid in the decision, one of the key ones is relative strength–how the stock is performing relative to other stocks (not be confused with the RSI indicator). Increasing relative strength is good; declining relative strength means take the next exit and funnel that money into stronger performers.
Alternate Entry Method
This method was not promoted by O’Neil, but is the primary entry method discussed in the Stock Market Swing Trading Video Course, which has many features that align with the CAN SLIM method (while CAN SLIM is called an investing method, many of the trades end up being swing trades if using a daily chart). When we have a very strong trend, we can utilize some other basic technical tools to occasionally get a bit better entry point.
In strong trending stocks, the pullbacks tend to fizzle. We have a drop, followed by a small rally and then another drop. This second drop often stalls just below the first and consolidates there. We can often get a better entry point by entering when the price breaks above that consolidation. This is a bit different than the CAN SLIM method which typically wants to see the price rally above a recent swing high.
Rudolph Technologies, discussed above, had two possible entries over March and April. We could have used the fizzle and consolidate method to gain a bit better entry point on both those trades. Approximate CAN SLIM entries are marked by the horizontal lines, while the alternate method entry points are the tops (breakouts) of the small boxes.
The CAN SLIM method provides a bit more confirmation that the price is moving higher, but results in sometimes paying a slightly higher price than what is required. The counter-argument is that the alternate method requires more finesse and analytical ability because we need to be able to see when the pullback has fizzled or when to hold off on taking a trade because it has more downside left.
Also, watch for big trendline breakouts on pullbacks. If there is a very visible trendline on the pullback, which is broken, that can often produce a viable entry as well. On the chart above, a trendline could have been drawn from the January high to above the March high…and the price broke above it April, right in between the CAN SLIM entry and the consolidation breakout entry.
AMAT, also discussed earlier, had a descending trendline on a pullback that also provided a viable entry. When the price broke above it in November it signaled the start of the next advance, and provided an entry slightly lower than the CAN SLIM method. The problem with trendlines is that they can be imprecise, not always exactly touching highs or lows. Therefore, wait for a strong break of the trendline, not just a few cent penetration. Waiting for a daily close that breaks a trendline definitively is one option. The angled line shows the potential trendline break trade, while the horizontal line shows an entry more in line with the CAN SLIM method.
Alternate Way to Take Profits
An alternate way to take profits is to use a trailing stop loss on the chart. In order to determine when to hold or sell a stock, according to Mr. O’Neil guidelines, you would need to study his book in detail.
To solve this problem, pick a time frame, such as daily or weekly charts. Enter your trades per the guidelines. Exit them if the price drops below the trailing stop loss line. ATR Stops or Chandelier Exits work well for this. If the price has a weekly or daily close below the indicator line, move your stop loss to a couple cents below the low of that price bar. If the price starts to rise the following day or week, you may not be stopped out. If it continues to drop, you will be stopped out. Stop losses need to be manually adjusted based on the indicator reading/level.
The following daily chart shows Applied Materials (AMAT) with ATR Stops (6,3) applied to it. Interestingly, taking profits at about 20% to 25% would have worked out very similar to the trailing stop loss method. The indicator is not intended for identifying entry points, only possible exits.
Using the same method on a weekly chart is much less prone to being stopped out during a major rally, and therefore is better for longer-term trades.
One advantage of the trailing stop loss is that it removes subjectivity. If the price starts to fall, the trade will be closed. This can also be a disadvantage, though, as the stop loss may trigger us out on a minor correction even if everything is still okay with the stock and trend. That said, there is always another entry point somewhere, so even if we do get stopped out at an inopportune time, usually we will be able to get back in and not miss much of the action.
The trailing stop may be used in conjunction with some of the other rules, such as if the stock flies higher by at least 20% in the first three weeks don’t take any exit signals, and hold the trade for at least 8 weeks (if the stock collapses back the entry point though, probably best to get out and reassess).
The trailing stop loss indicator may need to be slightly adjusted for different stocks. The ATR Stops (6,3) is a good place to start, but if you notice on historical data that the indicator resulted in poor exits, adjust it slightly so the indicator better fits the price data. This small tweak may aid in getting better exits on future trades.
Finding CAN SLIM Stocks
Many of these criteria (but not all) can be inputted into a stock screener like Finviz.com.
It is recommended to sort the results using the Performance button — in descending order based on Perf Year (performance for year). This way, you will see the strongest stocks at the top of the list.
Then, click the Charts button to see the recent price movements of the stocks. This chart view is an easy way to scan through lots of stocks in a short amount of time. Before buying a stock on the list, it should be exhibiting the entry criteria, and breaking out of a basing pattern or consolidation while in a strong overall uptrend.
Investors.com (IBD) also provides lots of tools to search for these stocks. Most of these features require a subscription to the site. The subscription is not required to find strong companies with strong price performance, but if you want help in following the system, an IBD subscription may be right for you.
StockRover.com is a comprehensive stock screener and they have compiled screeners based on the CAN SLIM method for subscribers. In the Stock Rover screener library, there are a number of variation on the strategy; but a simple screener is discussed here, and shown here (shares in millions–this could be capped to see stocks that fall within a certain number of shares outstanding. Q4 could be altered to another quarter or use QoQ as shown in the alternate screener below):
An alternative version may look something like this (1-year return vs. S&P 500 is %. QoQ change is %):
Basically, the exact criteria can be altered to suit individual preferences, and zero in on stocks that are exhibiting specific qualities and that are in a specific price area (relative to highs, for example). The numbers have been altered slightly on each of these screens, and end up producing very different results. Therefore, play with the numbers a bit when looking for stocks, as a slight variation may produce a great potential trade.
Final Word on the CAN SLIM Method
There are some awesome elements of the CAN SLIM method. Mainly, sticking to very strong trending stocks will tend to produce the best results for most people. If you are trying to time buying stocks that have very weak trends, the odds of success are lower. This is why it takes time to scan through stocks; we need to find the best trade candidates, not just the first trade setup that comes along.
You will notice that the strategy has an (approx.) 3:1 reward:risk ratio built in. Max losses are 8% (usually smaller) and the typical gain will be about 20% to 25%. This is a good guideline for any strategy. If a stock is performing really well, let it run, and consider implementing a minimum eight-week holding period or a trailing stop loss on the daily or weekly chart (weekly if you want to increase the holding period of the trades).
Many of the CAN SLIM features can be combined with the Stock Market Swing Trading Video Course. Looking for opportunities in the stocks that are strongest over the last year and/or 6 months puts money into the stocks that are performing the best. When they stop moving well, we get out or are stopped out. Therefore, look for strong trending stocks, and utilize the guidelines discussed in this article to start seeing your trading improve.
Not all CAN SLIM stocks are worth trading. Everything needs to align in order to take a trade. If a great stock sells off too much, for the purposes of this strategy, we leave it alone. Stick to the strongest stocks and only taking valid signals in stocks that align with the strategy criteria (or a close variation of it).
For more on this strategy, check out How to Make Money in Stocks by William O’Neil. While there are great elements to this strategy, ultimately each trader needs to find a method that they are comfortable with. Take elements you like from this trading style, and combine it with other techniques you may already be using successfully.
Written by: Jiva Kalan: A researcher and writer whose work is featured on DailyFinance, the Wall Street Survivor and Financial Choice.
and Cory Mitchell, CMT: Trader, investor and author of the Forex Strategies Guide For Day and Swing Traders and the Stock Market Swing Trading Video Course.
Disclaimer: This is not investment advice, or a recommendation to buy or sell any particular securities. Nor it is necessarily an endorsement of the Turtle Trader strategy. Historical and simulated results may not necessarily reflect future performance.