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Unknown Market Wizards

Jeffrey Neumann: Penny-Wise, Dollar Wise

A common theme that underlies Jeffrey Neumann’s spectacular trading career is that he is early. When NASDAQ transitioned the price quotes from fractions to decimals, he took advantage of the temporary trading opportunity created as different brokers authorized orders with different decimals.

 

In the adopted trading style, he enters his trades at the breakouts from long downtrend lines which is the earliest possible technical signal of a trend shift. This type of entry point often results in buying multiple false breakouts but Neumann gets out immediately if the breakout doesn’t follow through.

 

Neumann always looks to get in at the early stages of new product sectors, such as 3D printing. Many of these developing industries go through a cycle of a preliminary upward price wave because of hype over a new product. This generates excessive buying which is not justified by the fundamentals and then experiences a complete price drop once reality sets in. Sometimes these companies recover and sometimes they do not. Either way, Neumann seeks to catch the upward price movement phase.

 

Neumann’s trade entries are near the absolute low following a long decline and right before a massive, near-vertical rally. The trade entries look unnatural as if he had an advance copy of the following month’s prices. The key to such incredible effectiveness is that the trendline breakout is only one component of his overall strategy. Individually, buying trendline breakouts is a loser’s game. However, knowing which breakouts to buy is what makes his approach so powerful.

 

Neumann’s core trades share many of the following characteristics:

 

  • The stock has largely declined or is extending sideways movement near lows.
  • The company has a service or product that indicates significant potential on the upside.
  • There is a catalyst to indicate the chance for a near price rally. 
  • The stock is part of a sector that Neumann has defined as being primed for a substantial upward price move.
  • He is familiar with the product and has tried it himself.
  • The stock is showing some signs of life—either a sudden up move after a long period of decline or sideways price movement, or a sudden spike in volume after a prolonged period of relative inactivity or both.

When most of these elements are in place, Neumann is prepared to look for his breakout. Although it looks like a simple trade of buying a downtrend line breakout, it is a far more complex trade that considers a range of factors appropriately lined up.

 

Successful trading is a matter of skilful money management and not prediction. Neumann steps in only when he has a high conviction on a trade. His trading style requires a strong note of caution and would be dangerous for most traders to attempt. 

 

Extreme position concentration has helped Neumann because of three elements. 

 

First, he has a high success rate on his high-conviction trades. 

 

Second, he scales into his positions so that by the time he has as much as one- third of his account in a single stock or single sector play, his average entry price is much lower, providing him with a substantial cushion if the stock starts falling. 

 

Third and most importantly, he is very quick in liquidating his position if the stock starts moving down or against anticipation. Unless a trader has similar skills, taking such concentrated positions would be highly risky and would expose them to an account-ending loss.

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Units 8/13